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Current Issue: Volume 12, Issue 3 (2010) Private Regulation in the Global Economy Introduction Tim Büthe, Guest Editor The eleven articles in this special issue examine private regulation in the global economy from a variety of perspectives. The papers were first presented at an interdisciplinary workshop, held at Duke University in October 2009 to critically examine our current knowledge about private regulation of global markets and advance the research frontier through conceptual, theoretical, and empirical contributions. Many of the articles focus on previously little-known cases of private regulation with distributional implications and consequences for millions of participants in the global economy, including measurement standards for greenhouse gas emissions (Green), standards for electro-technology (Büthe), food safety standards set by retailers (Fuchs and Kalfagianni), private rules for cross-border financial transfers and the recognition of professional qualifications (Cafaggi and Janczuk), standards for the certification of food as "kosher" (Starobin and Weinthal), and rule-making for transnational commercial arbitration (Whytock). Others examine new aspects of familiar cases, such as the role of technological change in the private regulation of forestry practices (Auld, Cashore, et al), problems that arise in the implementation of such practices in developing countries (Bartley), or chances for public regulation to compensate for limits of private regulation in light of changing patterns of global production (Mayer and Gereffi). Jointly, the articles illustrate and analyze the politics behind the important phenomenon of transnational private regulation.
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SPECIAL ISSUES: Private Regulation in the Global Economy Global Economic Governance: Beyond Management by the United States and the European Union? Business Power and Global Governance
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Private Regulation in the Global Economy: Guest Editor's Note Tim Büthe
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Private Regulation in the Global Economy: A (P)Review Tim Büthe
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Private Standards in the Climate Regime: The Greenhouse Gas Protocol Jessica F. Green
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Engineering Uncontestedness? The Origins and Institutional Development of the International Electrotechnical Commission (IEC) Tim Büthe
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The Causes and Consequences of Private Food Governance Doris Fuchs and Agni Kalfagianni
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Private Regulation and Legal Integration: The European Example Fabrizio Cafaggi and Agnieszka Janczuk
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Transnational Private Regulation in Practice: The Limits of Forest and Labor Standards Certification in Indonesia Tim Bartley
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The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label Shana Starobin and Erika Weinthal
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Can Technological Innovations Improve Private Regulation in the Global Economy? Graeme Auld, Benjamin Cashore, Cristina Balboa, Laura Bozzi, and Stefan Renckens
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Private-Public Interaction in Global Governance: The Case of Transnational Commercial Arbitration Christopher A. Whytock
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Regulation and Economic Globalization: Prospects and Limits of Private Governance
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Frederick Mayer and Gary Gereffi PDF
Global Private Politics: A Research Agenda Tim Büthe
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ISSN: 1469-3569
Business and Politics Volume 12, Issue 3
2010
Article 1
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Private Regulation in the Global Economy: Guest Editor's Note Tim Büthe, Duke University
Recommended Citation: Büthe, Tim (2010) "Private Regulation in the Global Economy: Guest Editor's Note," Business and Politics: Vol. 12 : Iss. 3, Article 1. Available at: http://www.bepress.com/bap/vol12/iss3/art1 DOI: 10.2202/1469-3569.1349 ©2010 Berkeley Electronic Press. All rights reserved.
Büthe: Guest Editor's Note
The eleven articles in this special issue examine private regulation in the global economy from a variety of perspectives. The papers were first presented at an interdisciplinary workshop, held at Duke University in October 2009 to critically examine our current knowledge about private regulation of global markets and advance the research frontier through conceptual, theoretical, and empirical contributions. Many of the articles focus on previously little-known cases of private regulation with distributional implications and consequences for millions of participants in the global economy, including private standards for food safety (Fuchs and Kalfagianni), greenhouse gas emissions accounting (Green), cross-border financial transfers and the recognition of professional qualifications (Cafaggi and Janczuk), certification of food as "kosher" (Starobin and Weinthal), transnational commercial arbitration (Whytock), and electrotechnology (Büthe). Others examine new aspects of familiar cases, such as the role of technological change in the private regulation of forestry practices (Auld, Cashore, et al), problems that arise in the implementation of such practices in developing countries (Bartley), or chances for public regulation to compensate for limits of private regulation in light of changing patterns of global production (Mayer and Gereffi). Jointly, the articles illustrate and analyze the politics behind transnational private regulation. The Duke University workshop, which brought together scholars of political science, sociology, public policy, law, business administration, and environmental studies from the United States, Canada, and Europe, was generously supported by the Center for International Studies (DUCIS). Supplemental support was provided by Duke's Program on Democracy, Institutions, and Political Economy (DIPE). For their contributions to lively discussions, I thank all the participants of the workshop, which included, in addition to the authors of the papers published in this issue, Andrew Bell, Sarah Bermeo, David Brady, Keegan Callanan, Seth Cantey, Nathaniel Harris, Larry Helfer, Joonkoo Lee, Layna Mosley, Jan Pierskalla, Jim Salzman, Nicholas Troester, Dan Vermeer, Jared Woollacott, and Sean Zeigler, many of whom also served as discussants for individual papers. I also thank DUCIS executive director, Robert Sikorski, and DUCIS assistant director for programs, Daniel V. Smith, for their support of the project from start to finish, as well as Vinod Aggarwal, who as editor-in-chief of Business and Politics recruited tough but exceptionally knowledgeable and constructive anonymous reviewers for the individual papers and the issue as a whole. Before final acceptance, David Vogel read the entire special issue and made several additional helpful suggestions. Tim Büthe Durham, NC, October 2010 Published by Berkeley Electronic Press, 2010
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Business and Politics Volume 12, Issue 3
2010
Article 2
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Private Regulation in the Global Economy: A (P)Review Tim Büthe, Duke University
Recommended Citation: Büthe, Tim (2010) "Private Regulation in the Global Economy: A (P)Review," Business and Politics: Vol. 12 : Iss. 3, Article 2. Available at: http://www.bepress.com/bap/vol12/iss3/art2 DOI: 10.2202/1469-3569.1328 ©2010 Berkeley Electronic Press. All rights reserved.
Private Regulation in the Global Economy: A (P)Review Tim Büthe
Abstract This introduction to the special issue combines a review of the existing literature about the causes and consequences of private regulation in the global economy with a preview of the articles in this issue. To organize this (p)review, I introduce a conceptual model “beyond supply and demand,” which distinguishes three major subsets of stakeholders of global private regulation, which may (but need not) overlap: the political actors who call for private regulation, the rulemakers who provide such governance for the global economy, and what I call the “targets” of the private regulations, who are supposed to behave according to these private rules. I then highlight the three core questions addressed by the contributions to the special issue: (1) How do private bodies attain regulatory authority; why do private regulators provide governance; and why do the targets of the rules comply? (2) Who governs the global economy through private regulations? And (3) what are the effects of private regulation, and how does the rise of private regulation affect public regulatory authority and capacity? KEYWORDS: regulation, private governance, non-state actors Author Notes: Tim Büthe is Assistant Professor of Political Science at Duke University. He is online at http://www.buthe.info and can be reached via email at
[email protected]. He thanks the participants of the Workshop on Private Regulation in Global Economy at Duke University in October 2009, especially Christopher Whytock, as well as Eyal Benvenisti, Richard Stewart, and the anonymous reviewers for Business and Politics for helpful comments on previous drafts.
Büthe: Private Regulation in the Global Economy
1. Private Regulation Many economic activities that used to be regulated at the domestic level, if at all, are today governed by transnational private rules. These rules are set by a range of non-governmental bodies: industry associations, NGOs, networks of firms, technical experts, or groups of activists. Many of their rules are widely observed by producers of goods and services, and other economic actors, including many who did not participate in writing the rules. Private rules thus govern—that is, they enable and constrain—a broad range of activities in the world economy. Some of the private regulators, such as technical standards-developing organizations, operate largely out of the public view. Others, such as credit rating agencies, have recently become the object of intense scrutiny. These private rules cause firms, for example, to include particular safety features in their products, maintain or demand certain financial reserves, gather and keep records about their inputs or labor conditions at every step along the entire value chain. In short, they get various economic actors to do things they would otherwise not do. Transnational private regulators thus exercise power in the Dahlian sense; they are quintessentially political actors.1 In recent years, a small but fast-growing social science literature has started to examine these private regulators as political actors.2 Yet, there have been few studies of private regulation that analyze more than a single issue area and, as David Vogel recently observed, few specific cases of private regulation “have been studied in depth.”3 The articles in this special issue contribute to this literature by providing original insights into the causes and consequences of private regulation based on in-depth studies of particular cases of private regulation, many of them little
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Dahl 1957. Private regulation may be defined narrowly as rule-making by non-governmental actors. Private regulation in a broad sense entails private actors playing a major role—at one or more stages beyond implementation or compliance—in what might be called the “regulatory process” (Abbott and Snidal 2009) or the “governance sequence” (Büthe 2010c): agenda-setting, rule-making, implementation, monitoring, adjudication, and enforcement. Most private actors analyzed in the articles in this special issue play a role at two of more of these stages, but they are all rule-makers and in that sense meet even the narrow definition of private regulators. 2 Keohane and Nye (1972) first called attention to the political importance of transnational relations; Rosenau and Czempiel (1992) to “governance without governments.” A few transnational organizations that govern significant parts of many lives, such as the Catholic church, have a long history (Ryall 2001) and have been recognized as political actors for some time (Vallier 1972). Only recent work, however, has focused on transnational private bodies as rule-makers with regulatory functions for the global economy. Among the first were Cutler, Haufler, and Porter 1999c and Hall and Biersteker 2002. See also Büthe 2004; Rudder 2008. 3 D. Vogel 2008, 275. Published by Berkeley Electronic Press, 2010
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studied previously.4 Jessica Green examines the multi-stakeholder process for developing the Greenhouse Gas Protocol, the global measurement standard for corporate greenhouse gas emissions.5 Tim Büthe examines the origins and institutional development of the WTO-recognized yet non-governmental International Electrotechnical Commission, which sets standards for thousands of electrical and electronic products and components.6 Fabrizio Cafaggi and Agnieszka Janczuk examine the contribution of private regulatory regimes to economic and legal integration in the EU, including private rules for electronic payments, product safety, and professional accreditation.7 And Doris Fuchs and Agni Kalfagianni examine private standards for the quality, appearance, and safety of food, mostly set by American and European food retailers but regulating the behavior of farmer-suppliers in many developing countries.8 Tim Bartley then focuses on different patterns of adoption or implementation of transnational private standards for sustainable forestry and labor conditions in a major developing country: Indonesia.9 Shana Starobin and Erika Weinthal examine the certification of compliance with the oldest yet littlestudied private regulations: standards for kosher food.10 Graeme Auld and Benjamin Cashore with their co-authors examine private regulations for environmentally sound disposal of e-waste, and carbon offsets, as well as sustainable forestry and fisheries, organic coffee and tea.11 And Christopher Whytock examines the rules of transnational commercial arbitration as a means of dispute resolution between private parties from different countries.12 4
Altogether, this special issue focuses on private regulators that are themselves transnational, though all contributors are cognizant that, sometimes, rules developed by private actors from a single country become de facto global rules. Even the most powerful countries’ domestic rulemakers, however, are finding it increasingly difficult to command extraterritorial authority. Take the American Society for Testing and Materials (ASTM), one of the oldest U.S. sources of product standards for many manufacturing industries. In the early decades after World War II, products manufactured to its proudly “American” technical standards were assumed and accepted around the world for meeting the highest standards of quality, functionality, and consumer safety; its standards have also long been widely used in many foreign markets. Yet, after it increasingly lost standards users, including foreign government regulators, to more transnational organizations (especially ISO and IEC), ASTM felt forced in the early 2000s not only to boost the number of its non-U.S. members (firms and individuals, mostly from Canada and Mexico), but also to change its name to “ASTM International.” On ASTM’s website today, one searches in vain for any hint about what the “A” stands for in the acronym; see ASTM International 2010. 5 Green 2010. 6 Büthe 2010a. 7 Cafaggi and Janczuk 2010. 8 Fuchs and Kalfagianni 2010. 9 Bartley 2010. 10 Starobin and Weinthal 2010. 11 Auld, Cashore, et al 2010. 12 Whytock 2010. http://www.bepress.com/bap/vol12/iss3/art2 DOI: 10.2202/1469-3569.1328
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Büthe: Private Regulation in the Global Economy
Beyond in-depth studies of particular cases, this issue as a whole seeks to advance our understanding of private regulation in the global economy as a general phenomenon. In particular, the papers address three core questions: (1) How do private bodies attain regulatory authority? Why do private regulators provide governance and why do the targets of these rules comply? (2) Who governs in private regulation? (3) What are the effects of private regulation? In particular, what is the effect of the rise of private regulation on public regulatory authority and capacity? All of the analyses in this special issue take agency seriously and hence address the second question—“Who governs?”—from a variety of social science perspectives. Most of the articles also speak to the first and third set of questions, but they differ in emphasis. The first four articles, by Green, Büthe, Cafaggi and Janczuk, and Fuchs and Kalfagianni, focus especially on the supply of regulatory governance—the rule-making—by private bodies. Why the targets of private rules comply with those rules is at the center of the analyses by Bartley, Starobin and Weinthal, and Auld, Cashore, et al (a question also discussed briefly in other articles). Finally, Whytock‘s work on commercial arbitration and Frederick Mayer and Gary Gereffi’s discussion of the prospects and limits of private regulation in the context of economic globalization13 focus primarily on the relationship between public and private governance. In the remainder of this introduction, I first discuss the main explanations that scholars from various disciplines have offered for the rise of private market regulation in an increasingly global economy. I then introduce a conceptual model of private regulation. My three-fold distinction among stakeholders of private regulation builds upon, but goes beyond, traditional models of supply and demand for private regulation. I submit that this conceptual model leads to a better understanding of private regulation as a political phenomenon and is useful for identifying the key stakeholders and the incentives and constraints that they face to become meaningful actors in private regulation. I use the conceptual model to organize my review of the literature on private regulation in the global economy. Specifically, I discuss in this introduction the answers that the existing literature offers to the three sets of questions noted above and how the articles in this special issue contribute to that literature. In the conclusion, I then summarize the findings and raise questions for further research.
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Mayer and Gereffi 2010.
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2. Background: Regulatory Retreat of the State? “International commerce,” Cutler, Haufler, and Porter note in the introduction to their pioneering study of private authority, “operates most effectively … under the umbrella of a system of rules that govern the behavior of participants.”14 In fact, as Steven Vogel has pointed out, the liberalization of markets often increases the need for rules.15 Commercial actors, to be sure, have a long tradition of regulating some aspects of their commercial practices themselves, even transnationally.16 In the 20th century, however, the rules for commerce have increasingly been established by states through laws and regulations, as states gained greater control over their borders than arguably ever before.17 The literature on global governance and private regulation suggests several key reasons why governments are providing fewer and fewer of the rules for the global economy. First, many studies emphasize increasing complexity and rapid change. In consumer finance, for instance, the 1990s were characterized by rapid product innovation that made it increasingly difficult even for advanced industrialized countries’ regulators or legislators to keep up.18 Similarly, ever more complex financial products have become prevalent in international financial markets, where transgovernmental networks of regulators are arguably even further removed from the product innovation “on the ground.”19 Second, as economic activity itself becomes ever more transnational,20 effective regulation is arguably beyond the control of any one country’s national government. “Fundamentally,” Deborah Spar opens her analysis of private regulation of internet commerce, “governments cannot set the rules of cyberspace … because cyberspace, unlike governments, slips seamlessly and nearly unavoidably across national boundaries.”21 Trade similarly has affected the ability
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Cutler, Haufler, and Porter 1999a, 3. The authors thus extend to the international realm the more general insights from institutional economics that economic transactions are embedded in institutions (Coase 1937; Williamson 1985). 15 S. Vogel 1996. See also Jordana and Levi-Faur 2004. 16 E.g., Milgrom, North, and Weingast 1990. On the history of the lex mercatoria, see also Cutler 2003; for broader historical perspectives, see Greif 2006, Jansen and Michaels 2007, and Shaffer 2009 as well as Cutler’s (1995) critique of the notion of a private, economic sphere that is distinct from the public, political sphere. 17 Thomson and Krasner 1989. 18 Warren 2010. 19 Büthe and Mattli 2011; Mosley 2009; D. Singer 2007. 20 See Gereffi 1996. 21 Spar 1999, 32. Governments have, of course, regulated some aspects of internet commerce, most notably privacy protection, see Bignami 2005; H. Farrell 2003; Newman 2008; Shaffer 2000. Moreover, authoritarian governments have found numerous ways to keep their citizen from accessing the world wide net, even while not outright denying them access to some form of http://www.bepress.com/bap/vol12/iss3/art2 DOI: 10.2202/1469-3569.1328
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of regulators to ensure that products are safe for consumers, which has been particularly prominently discussed in the realm of food safety: Even the United States, one of the least trade-dependent countries, now imports 15% of its food supply, including 60% of the fruits and vegetables consumed in the United States and 75% of the seafood. And, increasingly, food products are imported ready-toeat, i.e., many imports no longer go through the relatively tightly regulated domestic food processing facilities before they reach the consumer. Food safety therefore cannot be effectively addressed as a purely domestic policy issue anymore.22 As Abbott and Snidal write, “the scale and structure of contemporary global production challenge the capacity of even highly developed states to regulate activities that extend beyond their borders.”23 One regulatory response to these changes in the global economy is to increase international cooperation among government regulators. Such regulatory cooperation can take place through treaties that establish international law and formal institutions such as the WTO, whose rules regulate many aspects of international trade, or the OECD, which has established rules (inter alia) against money laundering that are now widely (if begrudgingly) implemented.24 It can also take place through direct and often informal trans-governmental cooperation among specialized regulators from several countries, such as financial market regulators25 or competition watchdogs.26 International cooperation among government regulators, however, has proven cumbersome, slow, and often ineffective, especially when distributional conflicts are involved. Agreeing, for instance, on “safe” levels of pesticide residues or other health-related food standards in the (at least nominally governmental) Codex Alimentarius Commission has often taken the better part of a decade—far too long for effective regulatory responses to health scares.27 Even within the EU, a highly institutionalized forum for cooperation among a group of states whose preferences are usually far more closely aligned than at the global level, the harmonization of regulatory standards for manufactured goods took so long that the reduction of these non-tariff barriers as part of the Common Market project required delegating the task to private regulators.28 Similarly, more than a decade of negotiations among governments in the EU over the harmonization of internet; see, e.g., Milner 2006. Government control, however, tends to be very imperfect and is in a constant race with savvy programmers’ latest ideas how to work around the constraints. 22 See Büthe 2009; Coglianese, Finkel, and Zaring 2009. 23 Abbott and Snidal 2009, 44. 24 E.g., Helleiner 2002; Simmons 2000; Verdugo 2008. 25 D. Singer 2007. On transgovernmental networks more generally, see especially Raustiala 2002; Slaughter 2004, 36ff; and Verdier 2009. 26 Svetiev 2010; Wilks 2010. 27 Echols 2001. 28 Egan 2001; Joerges, Schepel, and Vos 1999. Published by Berkeley Electronic Press, 2010
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financial reporting yielded a grand total of two directives with many options and exceptions, prompting the EU Commission to suggest delegating the task to the non-governmental International Accounting Standards Board.29 These changes in the regulatory practices of governments—coincident with and reinforced by a broader shift toward a neoliberal ideology that delegitimized many forms of government intervention in the economy30— constitute the backdrop for private regulation in the global economy and arguably explain in part the increasing demand for private regulation. Scholars differ, however, about whether the trends described above are indeed indicative of a “retreat of the state”31 or a reconfiguration of the public and private sphere,32 which might be quite deliberate and intentional on the part of states seeking to retain primary control over key areas in a more interdependent world.33 3. Beyond Demand and Supply: A Threefold Distinction Among Stakeholders of Global Private Regulation In a review of two key early volumes on private governance, I argued for analyses of both supply of, and demand for, global private governance.34 My call for such political-economic models of private governance built on Walter Mattli’s compelling use of a model of demand and supply to explain success and failure of attempts to establish public institutions for the governance of markets at the regional (supra-national) level, as well as Hendrik Spruyt’s more informal yet powerful model of the demand and supply of governance to explain why rulers or governments have in many historical cases provided measurement standards for private markets—weights, measures, and coinage—but until the 20th century have left the supply of all other product standards mostly to market participants, i.e. private governance.35 Indeed, supply-and-demand models have been successfully used in numerous political-economic analyses of private regulation. Donald Lecraw, for instance, uses a model of supply and demand for product standards (and statistical analyses of empirical data for 252 types of manufactured goods) to identify industries and product categories in which the available stock of such standards is systematically below or above socially optimal levels.36 Shyam Sunder uses a (very informal) model of supply and demand for financial reporting 29
Büthe and Mattli 2011, chapter 4. Blyth 2002; Coen and Thatcher 2005; McNamara 1999. 31 Strange 1996. 32 Ruggie 2004. 33 Krasner 1995; see also Keohane 2009. 34 Büthe 2004, 283. 35 Mattli 1999, Spruyt 2001. 36 Lecraw 1984. 30
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standards to examine how changes in financial market regulations affect the cost of capital for publicly held corporations.37 And Mattli and Ngaire Woods use a schematic model of supply and demand of regulation (public or private) to assess the normative desirability of regulation based on the probability that it will serve the public interest.38 Notwithstanding the significant analytically usefulness of these models of private regulation in the international political economy, models of supply and demand also have at least two severe limitations as models of politics and especially as models of regulation. I briefly note the first limitation, then focus on the second. First, in economics, these models derive their analytical power from the fundamental idea of a long-term equilibrium between supply and demand, which may never be perfectly attained but towards which market pressures push both suppliers and demanders. This tendency toward equilibrium is made possible by the existence of a single unit of account and exchange in markets (money), which allows economists to assume that a wealth of motivations—including material desires, personal emotive attachment, and other tastes and norms—can be projected onto a single dimension, on which they can be compared and traded via the monetary price of goods. Politics lacks such a singular unit and hence the functional equivalent of price, which need not categorically inhibit but greatly complicates comparisons and trade-offs between interests and actors in politics and policy-making. Even “power,” arguably the base unit of politics, is analytically no match for money and price because, as David Baldwin has shown, power resources—such as political will, organizational capacity, market size, and material or military assets—lack stable conversion rates and are far less fungible than money across scope and domain.39 This first problem does not invalidate thinking of demand and supply for private regulation (as long as the domain is clearly specified), but it means that we may not be able to assume equilibrium. Consequently, deriving the preferences of possible suppliers and demanders (and deriving from their indifference curves the shape of supply and demand curves) may be a useful part of, but is not sufficient for, the analysis of politics or policy, including private regulation. And when we observe, for instance, a certain level of demand for private regulation, we should 37
Sunder 2002. The changes that are the focus of his analysis involve allowing competition among multiple financial reporting standard-setters. 38 Mattli and Woods 2009. 39 Baldwin 1989, esp. 5f, 10ff. In information-rich environments, it is possible to posit a “latent” single dimension, which can be estimated using Bayesian statistics, even if that dimension is not directly observable (see Jackman 2004). Embedding such latent variable calculations in an equilibrium model of supply and demand would, however, yield a very complex model (implicitly involving mulitple joint hypothesis tests), which to my knowledge has never yet been tried. Published by Berkeley Electronic Press, 2010
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not assume that it is (or will be) met by supply. Nor, when we observe a certain level of supply of private regulation, does it imply that there is an approximately corresponding level of demand. At a minimum, both supply and demand and then the politics of their interaction must be examined. The second problem further complicates the analysis, but recognizing it is crucial for understanding interests and agency in global regulation. In economic models of supply and demand, those who ultimately “buy” a product or service are not only identical with those who subsequently “use” it, they presumably purchase it in order to use it. This identity of user and buyer does not necessarily hold in politics. Specifically, in political models of regulation, the notion of “demand” for rules conflates two sets of stakeholders which, in practice, often diverge: those who would like to see, or are actively calling for, a set of rules, and those who are supposed to behave according to those rules, precisely because politics is often about exerting influence over others. I therefore argue that it is analytically more useful to distinguish three major subsets of stakeholders for private regulation: the actors who call for private regulation, the private actors who supply such rules for the global economy, and those whom I call the “targets” of the rules. The first group consists of political-economic actors who either overtly call for private regulation or value it to the point where they are willing to give credit or pay some cost for the provision of such rules. The intensity of their preferences explains the level of what we might call the “political demand” for private regulation (for any particular issue). The second group consists of the private actors who write, maintain, and disseminate regulatory rules for the global economy. Why they supply private regulation needs to be explained because these activities are costly. The third group consists of the political-economic actors whose behavior private regulations seek to affect. For them, the analytical question is about implementation and behavioral adjustment: Why do they comply with private rules? Any two or all three of these subsets of stakeholders may more or less overlap (see Figure 1),40 with analytical as well as normative implications. Idealtypical “self-regulation,” for instance, entails complete overlap of all three groups; conversely, the greater the share of stakeholders whose interests are affected but who have no voice in the rule-making process, the greater the democratic deficit in private regulation.
40
The figure recognizes that these three groups do not exhaust the range of possible stakeholders of private regulation, but each group constitutes a major subset of the stakeholders.
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Figure 1
3.1. Demand If a system of rules is indeed a requirement for the efficient operation of markets, then market participants should generally demand some level of regulation, and a decline in the public supply of such rules should naturally lead them to look to private actors to provide those rules. There are many empirical examples where this functionalist account, emphasizing market efficiency, provides at least a partial explanation of the demand for regulation. Financial market regulation in the United States, for instance, has its origin at least in part in investor expressions of concern about information asymmetries or political leaders’ expectation that
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regulation of disclosure, trading practices, etc. would lead to more efficient allocation of capital.41 Analogous expectations motivated many to push for the international harmonization of financial reporting by a private transnational body.42 The demand for model or “standard” contracts similarly arises from the efficiency gains such contracts afford.43 And within firms, the demand for rules that govern the internal exchange of information and goods—the ultimate example of private regulation—is commonly motivated by wanting to lower transaction costs, increase reliability, and generally achieve efficiency gains, which firm-internal studies often document.44 Practical necessity also has driven much of the demand for common standards among firms making products that communicate with each other, from basic telecommunications equipment to computer hardware and peripherals.45 In such cases, private-sector firms often push for private rule-making because they expect it to lead to more cost-effective rules more efficiently than government regulations.46 Demand for private regulation that is fully explained by private parties’ (correctly anticipated) efficiency gains raises few political or strategic issues and therefore plays no prominent role in the analyses in this special issue. It does, however, play a supporting role in Green’s analysis of the Greenhouse Gas Protocol and some of the illustrative examples in Cafaggi and Janczuk’s work on private regulation in Europe. Participants of a commercial transaction are of course not the only ones who can demand rules to govern that transaction (and other transactions like it). In fact, one of the most interesting developments in global governance has been the increase in the explicit delegation of regulatory authority by states to private actors.47 In Europe, this delegation has often taken the form of governments laying down general principles but leaving it to private bodies at the regional level to specify the best way to meet those public policy objectives without introducing non-tariff barriers to trade or otherwise fragmenting the Common Market through cross-national divergence in regulatory measures. For general product and electrotechnical standards, for example, the EU has delegated the rule-making 41
Banner 1998. Büthe and Mattli 2011, chapter 4; Camfferman and Zeff 2007; Martinez-Diaz 2005. 43 Perillo 2008; as well as Schwartz and Wilde 1979; Trebilcock and Dewees 1981 vs. Gazal-Ayal 2007. See also Hadfield 2001; 2009. 44 E.g., DIN (Deutsches Institut für Normung) et al 2000, 14f and Joynt 1972. See also Coase 1937 and Williamson 1985. Bureaucratic politics and inefficient rules of course can also be found within private enterprises but are beyond this review of the literature on private regulation. 45 David and Greenstein 1990; Farrell and Saloner 1987; Katz and Shapiro 1985; Migliaro 2006; Pelkmans 2001. 46 E.g., Abbott and Snidal 2009; Haufler 2001; D. Vogel 2008. 47 E.g., Avant, Finnemore, and Sell 2010. See also Avant 2005; Muthien and Taylor 2002; and P. Singer 2005, who show a similar trend beyond the economic realm. 42
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functions to the European Committee for Standardization, CEN, and its counterpart, CENELEC. Such delegation is at the heart of the EU’s “new approach to technical harmonization and standards,” adopted in 1985 to achieve the common market by 1992.48 Explicit public recognition and sometimes supplemental public financing for the private regulators underscore this governmental demand for private regulation. Similar delegation has occurred at the international level, for instance through the stipulation in the WTO’s TBT-Agreement that government regulations be based on international standards, defined (non-exclusively) as the standards set by the most important private product standard-setters, the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC).49 As Büthe discusses in his article, writing the IEC into the WTO treaty cemented the private standard-setters preeminence as the transnational forum for setting product standards in its area of expertise. In calling on private actors to regulate various aspects of the global economy, governments often seek not only cost savings, but flexibility and political efficiency, since the specific technical solution prescribed by private bodies can be adjusted as technology changes without the need for new intergovernmental negotiations.50 To the extent that the existing literature on private regulation examines such governmental demand for private regulation at all, it tends to emphasize these mostly economic benefits. The broader literature on the delegation of public authority, however, also identifies more overtly political motivations for delegation, such as blame avoidance and locking in policy preferences.51 Under what conditions may such political and strategic calculations generate demands by public authorities for private regulation? Cafaggi and Janczuk address this issue by examining several instances where the EU Commission and/or member states have fostered or elevated private regulation with the conscious objective to change the legal framework within which regional (and to some extent global) transactions take place. Drawing an important distinction, discussed further below, the authors analyze the strategic logic of public actors recognizing private rules ex post or explicitly delegating rule-making to private actors ex ante. Last but certainly not least, societal actors who are not a party to a commercial transaction may demand private regulation of such a transaction. 48
Egan 2001. Under the new approach, as Gregory Shaffer points out based on original 1985 documents from the Commission, “national authorities are obliged to recognize that products manufactured in conformity with harmonized standards … are presumed to conform to the ‘essential requirements’ established by the directive;” see Shaffer 2009, 174. See also Cafaggi and Janczuk 2010. 49 Marceau and Trachtman 2002; see also Trachtman 2003. 50 See Braithwaite 1982; Büthe, 2010b. 51 See especially Moe 1990; 2005. On international delegation more generally, see Hawkins et al 2006 and Bradley and Kelley 2008. See also Büthe 2010b. Published by Berkeley Electronic Press, 2010
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These third parties may demand regulation because their material interests are affected by externalities of the transaction in question—the classic market failure rationale for regulation. In the global economy, it appears to be rare, however, for third parties who are affected by classic economic externalities to call for private regulation, maybe due to the overtly (re)distributional character of such demands. The existence of such externalities makes it unlikely, as Mayer and Gereffi point out, for commercial interests to be aligned with broader societal interests. Far more common are demands for private regulation by third parties who feel that their non-material interests are affected by the existing or missing regulations. These private actors are often social activists, motivated by normative commitments that are altruistic (or at least perceived as such by these actors). Such agenda-setting demanders abound in the literature on the regulation of forestry practices,52 environmental management,53 and corporate social responsibility.54 Non-commercial third parties, however, often issue only general demands for regulation of the economic activity that they find objectionable rather than propose specific rules—creating incentives for the participants of that transaction to provide private regulation in order to forestall government regulation. Such demands play an important in Fuchs and Kalfagianni’s account of why the major multinational food retailers have in recent years sought to regulate their suppliers’ farming methods and other aspects of local production. This shifts our focus to the supply of private regulation. 3.2. Supply Writing, maintaining/updating, and institutionalizing rules is costly.55 Technical rules of high quality are therefore easily undersupplied.56 What, then, explains the existing supply of private regulation? Private supply of regulation often occurs in the shadow of public regulation. If the threat of less favorable public regulation is credible, then preempting public regulation is a powerful incentive for the supply of private regulation.57 Helleiner argues, for instance, that the consortium of major international banks known as the Institute of International Finance stepped in to 52
E.g., Bartley 2003; Cashore 2002; Cashore, Auld, and Newsom 2004; Meidinger, Elliott, and Oesten 2003. 53 Delmas 2002; Prakash and Potoski 2006. 54 Auld, Bernstein, and Cashore 2008; Baron 2001; Brown, Vetterlein, and Roemer-Mahler 2010; McBarnet, Voiculescu, and Campbell 2007; Ruggie 2004; Tamm Hallström 2006; D. Vogel 2005 and Weaver, Trevino, and Cochran 1999. See also Auld, Camargo, and Toseland 2007, as well as Blowfield 2005 vs. Henderson 2001. 55 Keohane 1984. 56 Kindleberger 1983; Lecraw 1984. 57 E.g., Balleisen 2010, 450f; Peters, Koechlin, and Zinkernagel 2009, 2f. http://www.bepress.com/bap/vol12/iss3/art2 DOI: 10.2202/1469-3569.1328
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regulate sovereign debt restructuring above all to break the momentum of an intergovernmental initiative for an IMF-sponsored international bankruptcy mechanism preferred by, and likely more favorable to, debtor countries.58 The shadow of public regulation also has implications for compliance with private regulation, as discussed below. Functional explanations of the political demand for private regulation, which emphasize anticipated efficiency gains, may be read to imply that such efficiency gains will also induce potential private-sector rule-makers to supply those rules. Such an ideal overlap of demanders and suppliers of private regulation, however, does not occur naturally but must be politically established, since collective action problems and especially incentives to free-ride can be expected to undermine the functionalist supply of private regulation. To be sure, private actors may be able to solve such collective actions problems on their own,59 but such solutions require conditions that seldom obtain.60 Far more common is the supply of private regulation in the expectation of private gains for the suppliers. Specifically, cooperation in rule-making allows participants to set regulatory requirements such that they create or retain barriers to entry, or create or reinforce an oligopolistic market structure, thus guaranteeing for themselves profits well in excess of the cost of supplying private regulation by minimizing competition and/or shifting competition away from price.61 The structure of the market for bond ratings, for instance, fits this description of private regulation.62 Suppliers may of course also be transnational civil society organizations (NGOs) with altruistic motives. They, too, however, gain a private benefit from the supply of private rules if it allows them to bring about rules and outcomes closer to their normative preference than they would obtain by seeking to influence public laws and regulations. Supplying private rules can also bring benefits by lowering the cost of compliance for those who provide private regulation (as a function of the particular rules) or by institutionalizing and thus safeguarding the exclusive rulemaking privilege of a particular set of experts (guaranteeing greater subsequent influence for a particular set of interests). The result can be less stringent regulations with more loopholes than would have come about through a more inclusive process,63 but the opposite is also possible: Firms that already use clean technology or produce products with multiple safety features, for instance, may seek to establish more stringent environmental or consumer protection through 58
Helleiner 2009. See Coase 1990. 60 Abbott and Snidal 2001. 61 Cutler, Haufler, and Porter 1999a, 7; Lecraw 1984, 509f. 62 E.g., Sinclair 1999, 156. 63 E.g., D. Murphy 2004. 59
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private regulation in order to gain an advantage vis-à-vis their competitors.64 Prakash and Potoski have documented such a competitive “race-to-the-top” dynamic for voluntary certifications of compliance with ISO 14,000-series standards for environmental impact assessment. And Henk de Vries has provided specific illustrative examples of firms participating in international standardization strategically, such as when a Dutch medical products manufacturer pushed successfully to raise European and international standards for the disinfection of medical devices so that they could no longer be met by low-cost competitors.65 These distributional implications of the supply of private regulation by some particular subset of stakeholders in turn create incentives for those who do not like the rules written by one private regulator to seek to write a more favorable set of rules in a different forum or set up a new, competing private regulator in the same issue area. Market competition between several private rules or regulators is in fact quite common. It is a core feature of the domestic system of product standardization in the United States.66 At the international level, it characterizes the regulation of corporate social responsibility,67 “fair trade” labeling,68 and electronic waste.69 In each of those issue areas (and numerous others), rules and norms developed by transnational civil society NGOs compete with rules and norms developed by firms. Such competition is also common among firms in the information and communication technology industry, where Sony, Philips, and Panasonic, for example, cooperated via a consortium to develop the Blu-ray optical disc format in the early-mid 2000s while a rival consortium, led by Toshiba, developed the alternative HD-DVD format. Such competition among multiple rule-makers, however, can be inefficient and lead to protracted battles for predominance, which are not necessarily won through deliberate consumer choice or by the superior technology but, if they are won at all, through political maneuvers, side payments, and collusion.70 Economic analyses therefore often consider such competition wasteful. After the “standards war” between HD-DVD and Blu-ray, for instance, which raged from 2006 to 2008, the Blu-ray format effectively became the global standard after the Blu-ray consortium offered side payments to enough computer manufacturers, movie 64
See D. Vogel 1995. See also Balleisen 2009. Prakash and Potoski 2006; de Vries 2006, 134. Note that such raising of standards can actually be detrimental to the availability of suitable (and affordable) products for developing countries; see Malkin 2007. 66 Büthe and Witte 2004, chapter 3; Büthe and Mattli 2011, chapter 6. 67 E.g., Kirton and Trebilcock 2004:189ff; D. Vogel 2005. 68 E.g., Jaffee 2007; Levi and Linton 2003; Raynolds, Murray, and Wilkinson 2007; Renard 2003; Taylor 2005. 69 Renckens 2010. 70 E.g., David 1985; Surowiecki 2002. 65
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studies, and retailers for throwing their support behind Blu-ray to “tip” the market in favor of that format.71 Competition among multiple private regulators plays an important role in several of the papers in this special issue. The relative ease of establishing competing regulators is a reason for several of the concerns raised by Mayer and Gereffi about the “limits” of private regulation. Bartley examines differences in the competition among different standards as a reason for differences in the implementation of labor and forestry standards in Indonesia. And Auld, Cashore, et al examine the incentives and disincentives which competition creates for the adoption of new technologies for monitoring and certification of compliance. Competition among multiple rule-makers, however, is not a universal feature of private regulation, even when distributional issues are involved. An important question for research on private regulation therefore concerns the variation in competition among private regulators. What constrains such competition and what allows a particular private body to establish itself as the institutional focal point for private regulation of a particular aspect of the global economy? Green’s analysis of the collaboration between the World Resources Institute, an activist NGO, and a group of corporations known as the World Business Council on Sustainable Development addresses this question directly, as does Büthe’s analysis of the origins and institutional development of the International Electrotechnical Commission, focused on how this organization of technical experts became the preeminent private regulator of electro-technology for global markets. Various institutional constraints on the competition between private standard-setters also play a role in the analyses by Cafaggi and Janczuk, Fuchs and Kalfagianni, Starobin and Weinthal, and Whytock.
We do not yet know under which conditions actors ‘obey’ norms that are not defined by states – Graz & Nölke (2008), 2
3.3. Compliance Even when the rules are written by a private body with no power to mandate implementation, compliance may be required by national laws or regulations and enforced through legal or regulatory procedures. Domestic measures that render private rules mandatory have accompanied the explicit delegation of regulatory authority to private-sector bodies in the United States for many years.72 Under 47 CFR 15.109, for instance, the U.S. Federal Communications Commission requires 71
E.g., Sanchanta 2008. See also Büthe and Mattli 2011, chapter 2. Cheit 1990; Hamilton 1978; Macaulay 1986; Salter 1988. In addition, what Coglianese and Lazer (2003) call “management-based regulation,” effectively delegates significant rule-making all the way to individual firms. 72
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radio equipment either to comply with specifications written into the statute or “with the standards contained in [Publication 22] of the International Special Committee on Radio Interference” (a technical committee of the IEC). In more recent years, this practice has also become common in other countries and transnationally.73 The Canadian Medical Devices Regulation SOR/98-282, for instance, requires compliance with ISO standard 13485.74 Notwithstanding the importance of public measures that make private rules mandatory, the targets of private regulations often comply with those rules even when compliance is not required. To understand why, it is useful to distinguish between economic and political incentives for compliance. Permissive Economic Conditions: Previous studies have identified two permissive economic conditions for compliance with private regulations: constrained competition among those targeted by private rules and the existence of brand names with reputational value. Constrained competition, e.g. due to an oligopolistic structure of a given market, is conducive to compliance because it makes it easier for the targeted firms to absorb the cost of compliance.75 Some scholars, however, argue to the contrary that it is precisely intense competition that prompts attempts to escape competing on price by distinguishing one’s firm or industry through visible commitments to transnational standards.76 Two articles in this special issue examine market structure directly. Bartley studies two industries (forestry and especially apparel) in which international price-based competition has intensified and examines whether attempts to shift from pricebased competition to competition on not-directly-observable environmental or social characteristics, such as labor conditions, in fact occurs. Fuchs and Kalfagianni focus instead on the structure of the food retail sector, that is, among the immediate customers of the developing country farmers that are the ultimate producers. They examine whether an oligopolistic market structure allows the major food retailers not only to set standards, but also to elicit high levels of compliance through their control of market access, as farmers in any given location usually have no alternative buyer. Firms with valuable brands generally appear to have a stronger commitment to compliance. Major Western sporting goods manufacturers, for instance, have long demanded that their developing-country-based suppliers conform with labor standards that limit or prohibit child labor and “sweatshop” conditions.77 As producers of brand-name retail goods, such firms are generally 73
E.g., Braithwaite and Drahos 2000; Gunningham and Rees 1997; Singh 1993. ISO/IEC 2007, 19, 23. See also BSI 2006. 75 Haufler 2001. See also the discussion above re. oligopolistic competition as a permissive condition for the supply of private regulation. 76 Polaski 2006. 77 Bartley 2005; Locke, Qin, and Brause 2007. 74
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better able than low-cost local producers to absorb the cost of compliance.78 Moreover, these businesses have an incentive not to risk the value of the brand, and brand-names make it easier for consumers to punish non-compliance79—at least if the consumers learn about it. Prakash and Potoski’s finding that foreign direct investment by multinationals from home countries with high private voluntary environmental standards leads to aggregate (national-level) increases in the implementation of, and compliance with, those same environmental standards in the host country suggests, however, that brand names are not a necessary condition for compliance with transnational private regulations.80 Economic Incentives: The apparent conduciveness of brand names for compliance is supposedly due to brands empowering consumers to provide economic incentives for others along the global value chain to act in accordance with the consumers’ preferences for sustainable resource use, higher wages/prices paid to farmer and farm workers, etc. If this is correct, then we might ask whether such incentives can be provided in other ways. The more general problem here is overcoming the information asymmetry between producers and consumers or generically between buyers and sellers. As Akerlof pointed out in “The Market for Lemons,” such information asymmetries depress the quality and size of markets.81 Both sides therefore have some economic incentive to overcome it. Starobin and Weinthal examine one of the most prominent ways in which private regulators have sought to do so: monitoring and certification by a third party whose neutrality affords credibility.82 They raise questions about the sources of credibility in third-party certification and caution that third-party monitoring is truly effective only under rather restrictive conditions, and even under those conditions is still far too costly for most of the poor and marginalized producers and workers in developing countries, who are ostensibly the intended beneficiaries of many such regulations. Auld, Cashore, et al share Starobin and Weinthal’s concern about the often high costs of documenting compliance and the consequently low rates of adoption of many private regulations. They therefore analyze whether technological innovations such as tracking chips or satellite-
78
Arnold 2003, 93. Graz and Nölke 2008a, 4; Radin 2003. 80 Prakash and Potoski 2007. Note, though, that in the realm of labor standards, actual compliance, when independently measured, does not appear to experience a similar boost from international economic integration; see Greenhill, Mosley, and Prakash 2009. 81 Akerlof 1970. See also Héritier, Mueller-Debus, and Thauer 2009 for a formal model of firms as monitoring compliance of their suppliers, motivated by the logic of information asymmetries and risk, which underpins Akerlof’s argument. 82 See also Bartley 2003; Cashore 2002; Guler, Guillén, and MacPherson 2002; Kirton and Trebilcock 2004; Meidinger 2006; Ponte 2008; Terlaak and King 2006. 79
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based video monitoring can lower the cost of monitoring and hence the cost of certified compliance. Economic incentives for implementation and compliance can also be the result of network externalities.83 Network externalities arise whenever the benefit one derives from a particular choice increases with the number of others who have made the same choice, or when the value of a product increases with the extent to which complementary products are available. Having a cell phone, fax machine, or network-able computer is only useful to the extent that it can send and receive a signal that allows me to connect with those with whom I want to communicate.84 Some argue that such network externalities are quite rare,85 but many find them to be pervasive.86 The benefits of the size of the “network” are positive externalities to the extent that they are not reflected in the cost of producing, nor the price of acquiring the good, and therefore create an incentive to comply with the most commonly used standard. Network externalities play some role in many of the empirical cases examined in this special issue. The usefulness of GHG Protocol-based emissions reporting for trading GHG emission rights due to the adoption of the Protocol by many other firms and by the Chicago Climate Exchange, for instance, reinforces the centrality of the singular standard-setter analyzed by Green. Similarly, the value of using IEC measurement standards—internally and for communicating characteristics of a manufactured good—is higher for any particular company because those standards are already widely used by others, which facilitates information exchange and lowers transaction costs, as noted by Büthe. The usability and cost-effectiveness of many of the technological innovations discussed by Auld et al also depend upon how widely they are taken up. Network externalities, however, are not at the center of the analyses in this issue. Socio-Political Incentives: I distinguish between four socio-political incentives for compliance with private regulations even when compliance is not mandated by any government. First, private rules—such as the International Chamber of Commerce’s guidelines for commercial letters of credit for international trade87— define what is often interpreted as “best practice.” A firm that does not implement widely accepted standards for workplace safety, for instance, may face a higher insurance premium.88 Should an accident occur and lead to a lawsuit, having complied with the private regulations does not necessarily safeguard the firm 83
Abbott and Snidal 2001; David 1985, 1993; Heyder 1997; Katz and Shapiro 1985. Farrell and Saloner 1987. 85 Liebowitz and Margolis 1994. 86 E.g., Grewal 2008; Shy 2001; Tirole 1988. 87 Levit 2008. 88 Ericson, Doyle, and Barry 2003. 84
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against losing in court. But, as Cafaggi and Janczuk discuss in the EU context, not having complied (and thus not having implemented the industry’s “best practice”) will in many jurisdictions substantially increase the risk of being found negligent.89 The legal implications of non-compliance thus create a strong incentive for compliance.90 Second, NGO monitoring often plays an essential role in ensuring compliance, since it allows various stakeholders to hold the targets of the regulations accountable, i.e. to reward compliance and punish non-compliance. The monitoring NGOs may then themselves bring pressure to bear on the targets of the regulations (usually for-profit companies) or information provided by a transnational NGO may prompt local activist NGOs to organize a campaign directly targeting non-compliant companies. Such campaigns can involve appeals to senior management, public naming and shaming, calls for incorporation of the private rules into domestic laws or regulations, or other forms of political lobbying. Alternatively, or in addition, consumers, stimulated by activist civil society groups, may demand compliance through their purchasing behavior, subtly or vocally through an explicit boycott. Such shifts in consumer demand have led many businesses to commit at least rhetorically to various “fair trade” standards.91 However, such third-party involvement differs considerably across issue areas, and we have little systematic knowledge about its effectiveness. In this special issue, the paper by Starobin and Weinthal, in particular, explores how differences in monitoring (and in the motivation of the monitors) affect compliance with various private regulations. Relatedly, the sustainability over time of monitoring by civil society groups is one of the key concerns discussed by Mayer and Gereffi. Third, the political motivations for supplying governance may also provide incentives to comply. As discussed above, one key motivation for businesses to contribute to the supply of private regulation is to forestall (or minimize the scope of) government regulations. One reason for such a preference is that companies may be assured a more prominent voice when standards are set (and updated) by non-governmental bodies than when they are fixed through
89
See also Basedow 2008; Cafaggi 2009; Michaels and Jansen 2006. To the extent that such compliance is costly, this also creates an incentive for the targets of the private rules to seek a seat at the table during the rule-making stage. It creates an incentive to increase the overlap between the two subsets of stakeholders. Participation of the targets of private regulation in the rule-making is, however, in practice often forestalled by the geography of transnational private regulation, where information about regulatory measures often reaches the targets in the South only long after they have been adopted as the new or updated regulatory rules, as illustrated by Bartley’s analysis of forestry and labor standards in Indonesia. 91 See, e.g., Cashore, Auld, and Newsom 2004; Jaffee 2007; Kirton and Trebilcock 2004; Levi and Linton 2003; Raynolds, Murray, and Wilkinson 2007. 90
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government regulation.92 Compliance is a way to safeguard that privileged voice. This compliance incentive, however, is counteracted by a free-riding incentive. In what is considered an exemplary case of pro-active industry self-regulation after the Three-Mile Island nuclear power plant accident, the private U.S. Institute of Nuclear Power Operations created a “new responsibility-centered industrial culture” among its corporate members.93 Yet, this “success” of voluntary compliance to avoid government regulation and enforcement, Bridget Hutter points out, was only achieved through sustained peer pressure and institutional mutual assurances (of compliance) among the firms in that industry.94 More generally, the incentive to comply in order to safeguard the benefits of private supply may be a function of how directly targeted firms experience those benefits: Compliance may be harder to maintain the more the set of firms targeted by the private regulations diverges from the set of firms involved in rule-making. Finally, although legitimacy in the eyes of the regulated is not a prerequisite for being effective as a regulator,95 private regulators may be more efficient if their rules (or at least their rule-making) are perceived as legitimate.96 Many scholars therefore equate private regulation with private “authority,” defined in a Weberian sense by Cutler, Haufler, and Porter as issue-specific “decision-making power […] that is generally regarded as legitimate.”97 But perceptions of legitimacy can be strategically manipulated—an issue examined by Fuchs and Kalfagianni—and they do not exist independent of a social relationship. We must therefore ask: Regarded legitimate by whom? The papers in this special issue provide examples of a range of economic and social relationships between the suppliers of private regulation and the targets, which will allow me to return to this issue in the conclusion. 4. Who Governs? Much of the theoretical discussion of regulation is devoid of actors or agency, as Avant, Finnemore and Sell observe more generally for the literature on global governance.98 But the actors are central to any analysis that really advances our understanding of private governance as a political process. The articles in this special issue therefore seek to bring out their agency.
92
Coglianese and Lazer 2003; Haufler 2001. Rees 1994. 94 Hutter 2006, 66. See also King and Lenox 2000. 95 See, e.g., Neubert 2009 and Galeotti 2001. 96 E.g., Bernstein and Cashore 2007; Cashore 2002; Graz and Nölke 2008b. 97 Cutler, Haufler, and Porter 1999b, 362. 98 See Avant, Finnemore, and Sell 2010. 93
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Differentiating analytically between demanders, suppliers, and targets of private regulation puts the focus explicit on actors and their motivations for the observed behavior and thus helps answer Robert Dahl’s classic, deceptively simple question in this realm: Who governs the global economy through private regulations? Especially in the supply of private regulation, commercial actors (and technical experts funded by commercial interests) are clearly the most prominent and influential actors. They exercise agency by setting the rules for trade in “conflict-free” diamonds,99 determining the codes of corporate conduct that define “corporate social responsibility,”100 and setting most international product standards in ISO101 and IEC.102 Yet, other actors also play an important role in private regulation. Transnational NGOs and domestic civil society organizations, in particular, play a crucial role not only because, as demanders of private regulation, they have agenda-setting power, but also because their monitoring creates incentives for compliance by the targets of private regulation. As Mayer and Gereffi note, however, the existing literature is short on systematic analyses of the conditions under which we can rely upon fully private civilsociety monitoring and enforcement to ensure lasting compliance, since such volunteer-driven and -funded NGOs face strong organizational incentives to move on to new topics even if the need for monitoring of compliance with private regulation continues unabated. Starobin and Weinthal directly address this question through the comparative element of their study: private monitoring provides a lasting incentive to comply with the requirements for the kosher food certificate but not for “fair trade” certificates. Finally, states and government agencies do play an important role, albeit by definition not directly as rule-makers in private regulation. At a minimum, they usually take a permissive attitude—though the institutionalization of private regulation may frequently occur below the radar of government regulators.103 And quite sometimes, they exhibit notably more agency be creating incentives for the supply of private regulation, including through credible threats of government regulation. 5. Private Regulation & Public Authority Some have portrayed the rise of private authority as inherently diminishing public authority. There are at least three reasons not to accept this as a general 99
Haufler 2009. D. Vogel 2008. 101 Mattli and Büthe 2003; C. Murphy and Yates 2008. 102 Büthe 2010a; 2010c. 103 Djelic and Sahlin-Andersson 2006, esp. 390ff. 100
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conclusion. First, many private regulators have written rules, monitored compliance, or even enforced rules that govern aspects of global markets not previously regulated by public regulators. Second and relatedly, power is not zero-sum. Baldwin’s analysis of the relationship between Robinson Crusoe and Friday starkly illustrates this point: Trying to keep Friday from running away, Robinson Crusoe (RC) ties the boy to himself with a rope. The rope allows RC to restrict Friday’s movements: RC thus has clearly gained power over Friday. But this power cannot have come at Friday’s expense, since neither had any power over the other before Friday arrived on Crusoe’s island. What’s more, tied to Crusoe by the rope, Friday has also gained some amount of power over RC.104 Regulatory power similarly is not zero-sum. To the extent that private regulation enables governments to solve or ameliorate inherently transnational problems that no government can effectively solve unilaterally, such as truly global environmental problems (ozone layer depletion, global warming), regional environmental problems (fishery stocks), or systemic financial risk (money laundering, murky accounting), the rise of private regulators need not diminish state power at all. In previous work, Bartley has given the example of the Austrian government, which sought to encourage sustainable forestry abroad through trade restrictions but quickly found this to be a violation of the country’s obligations under its international trade agreements. The government’s international law experts determined, however, that it would be permissible to have a privately issued certificate provide the information that would allow Austrian retailers and consumers to discriminate, which prompted Austria to provide a substantial part of the start-up funding for what became the Forest Stewardship Council.105 As Krasner argued about transnational actors generally, transnational private regulators can enhance state power or allow governments to escape constraints.106 A third reason to reject the claim that the rise of private regulators inherently diminishes public regulatory authority is that private regulators often depend upon public authority as enabler or enforcer, as discussed by Mayer and Gereffi and analyzed in a particularly interesting context by Whytock.107 Whytock traces the evolution of transnational commercial arbitration in the context of the economic globalization of the last 20-30 years. This method of dispute resolution is often seen as the quintessential example of private regulation since private parties commit via contract to a set of legal principles, rules for the selection of the arbitrators, and usually a waiver of their right to use traditional litigation instead. Whytock questions, however, whether this form of governance can 104
Baldwin 1993, 18f. Bartley 2003. 106 Krasner 1995. 107 See also Balleisen 2010, esp. 468ff. 105
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operate effectively on a global scale independent of states with stable and wellfunctioning judicial systems, given the limits of reputational enforcement mechanisms. Under which conditions then would private regulators diminish state power? Here we need to ask: What are the alternatives to private regulation in a global economy? What kind of governance would be most likely in the absence of private regulation? The articles in this special issue address these questions in specific contexts, as warranted, but jointly suggest a broader point: It may be more fruitful to think of various configurations of contestation and complementarity between public and private authority. I will return to that issue in the conclusion. References Abbott, Kenneth W., and Duncan Snidal. 2001. “International ‘Standards’ and International Governance.” Journal of European Public Policy 8 (3): 345370. ——— and ———. 2009. “The Governance Triangle: Regulatory Standards Institutions and the Shadow of the State.” In The Politics of Global Regulation, edited by Walter Mattli and Ngaire Woods. Princeton: Princeton University Press, 44-88. Akerlof, George A. 1970. “The Market for Lemons: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84 (3): 488-500. Arnold, Dennis G. 2003. “Philosophical Foundations: Moral Reasoning, Human Rights, and Global Labor Practices.” In Rising Above Sweatshops: Innnovative Approaches to Global Labor Challenges, edited by Laura Pincus Hartman. Santa Barbara, CA: Greenwod Publishing, 77-99. Auld, Graeme, Steven Bernstein, and Benjamin Cashore. 2008. “The New Corporate Social Responsibility.” Annual Review of Environment and Resources 33: 413-435. Auld, Graeme, Marisa Camargo, and Rebecca Toseland. 2007. “Corporate Social Responsibility: A Research Bibliography.” Unpublished manuscript, Yale University, January. Auld, Graeme, Benjamin Cashore, et al. 2010. “Can Technological Innovations Improve Private Regulation in the Global Economy?” Business and Politics 12 (3). ASTM International. 2010. “ASTM International: Standards Worldwide.” Website www.astm.org (last accessed 2 October 2010). Published by Berkeley Electronic Press, 2010
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Terlaak, Ann, and Andrew A. King. 2006. “The Effect of Certification with the ISO 9000 Quality Management Standard: A Signaling Approach.” Journal of Economic Behavior & Organization 60 (4): 579-602. Thomson, Janice E., and Stephen D. Krasner. 1989. “Global Transactions and the Consolidation of Sovereignty.” In Global Changes and Theoretical Challenges, edited by Ernst-Otto Czempiel and James N. Rosenau. Lexington, MA: Lexington Books, 195-219. Tirole, Jean. 1988. The Theory of Industrial Organization. Cambridge, MA: MIT Press. Trachtman, Joel. 2003. “Addressing Regulatory Divergence Through International Standards: Financial Services.” In Domestic Regulation and Service Trade Liberalization, edited by Aaditya Mattoo and Pierre Sauvé. Washington, DC: World Bank Publications, 27-41. Trebilcock, Michael J., and Donald N. Dewees. 1981. “Judicial Control of Standard Form Contracts.” In The Economic Approach to Law, edited by Paul Burrows and Cento G. Veljanovski. London: Butterworth, 93-119. Vallier, Ivan. 1972. “The Roman Catholic Church: A Transnational Actor.” In Transnational Relations and World Politics, edited by Robert O. Keohane and Joseph S. Nye. Cambridge, MA: Harvard University Press, 129-153. Verdier, Pierre-Hugues. 2009. “Transnational Regulatory Networks and Their Limits.” Yale Journal of International Law 34 (1): 113-172. Verdugo, Concepcion. 2008. “International Standards in Anti-Money Laundering and Combating the Terrorist Financing Regulation: Compliance and Strategy Changes.” Global Business and Economics Review 10 (3): 353378. Vogel, David. 1995. Trading Up: Consumer and Environmental Regulation in a Global Economy. Cambridge, MA: Harvard University Press. ———. 2005. The Market for Virtue: The Potential and Limits of Corporate Social Responsibility. Washington, D.C.: Brookings Institution Press. ———. 2008. “Private Global Business Regulation.” Annual Review of Political Science 11: 261-282. Vogel, Steven K. 1996. Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries. Ithaca, NY: Cornell University Press. Warren, Elizabeth. 2010. “Redesigning Regulation: A Case Study from the Consumer Credit Market.” In Government and Markets: Toward a New Theory of Regulation, edited by Edward J. Balleisen and David A. Moss. New York: Cambridge University Press, 391-418. Published by Berkeley Electronic Press, 2010
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Weaver, Gary R., Linda K. Trevino, and Philip L. Cochran. 1999. “Corporate Ethics Policies of the Mid-1990s: An Empirical Investigation of the Fortune 1000.” Journal of Business Ethics 18 (3): 283-294. Whytock, Christopher A. 2010. “Public-Private Interaction in Global Governance: The Case of Transnational Commercial Arbitration.” Business and Politics 12 (3). Wilks, Stephen. 2010. “Competition Policy: Towards an Economic Constitution?” In Policy-Making in the European Union (6th edition), edited by Helen Wallace, Mark A. Pollack, and Alasdair R. Young. New York: Oxford University Press, 133-155. Williamson, Oliver E. 1985. The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. New York: The Free Press.
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Article 3
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Private Standards in the Climate Regime: The Greenhouse Gas Protocol Jessica F. Green, Case Western Reserve University
Recommended Citation: Green, Jessica F. (2010) "Private Standards in the Climate Regime: The Greenhouse Gas Protocol," Business and Politics: Vol. 12 : Iss. 3, Article 3. Available at: http://www.bepress.com/bap/vol12/iss3/art3 DOI: 10.2202/1469-3569.1318 ©2010 Berkeley Electronic Press. All rights reserved.
Private Standards in the Climate Regime: The Greenhouse Gas Protocol Jessica F. Green
Abstract This paper seeks to explain the success of two NGOs in creating standards for calculating and reporting greenhouse gas (GHG) emissions at the level of an entire company. These emissions accounting standards, called the Greenhouse Gas Protocol, have been widely adopted by multinational firms, emissions reporting registries, and even an emissions trading scheme. The paper traces the widespread adoption of the standards, and then offers an explanation for this successful instance of private regulation. It presents a supply and demand model of private entrepreneurial authority—where private actors project authority without delegation by states. The two NGOs were successful rule-makers because they were able meet a demand for three benefits to potential users of the standard: reduced transaction costs, first-mover advantage, and an opportunity to burnish their reputation as environmental leaders. The paper also explains the supply of private authority—that is, why we see entrepreneurial authority rather than delegation by states. The disagreement among developed countries on the appropriate role for emissions trading in the climate regime delayed action on developing firm-level accounting methodologies. Moreover, the relative weakness of the focal institution in the climate regime—the climate change Secretariat—meant that there was no obvious international organization to take up the task of creating new measurement tools. KEYWORDS: private governance, regulation Author Notes: Jessica Green is Assistant Professor in the Department of Political Science at Case Western Reserve University. She can be reached via email at
[email protected]. The author would like to thank Graeme Auld, Tim Büthe, Seth Cantey, Benjamin Cashore, Jeff Colgan, Christina Davis and Erika Weinthal for comments on earlier drafts, as well as participants in the APSA 2009 Panel, “Private Rules, Public Goals.” She also acknowledges the helpful interviews with Janet Ranganathan and Pankaj Bhatia, who patiently answered many questions about the process of creating the Greenhouse Gas Protocol.
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1. Introduction Just as financial accounting measures the inflow and outflow of money, greenhouse gas accounting provides an inventory of gases that are put into and removed from the atmosphere. This paper traces the creation of the predominant greenhouse gas (GHG) accounting scheme, called the Greenhouse Gas Protocol. The Protocol was created by two non-governmental organizations (NGOs), namely the World Resources Institute (WRI) and the World Business Council on Sustainable Development (WBCSD), in extensive consultation with numerous firms, NGOs and government agencies. The net result of this process is the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard, which has been widely adopted by emissions reporting schemes around the world. Virtually all GHG registries—which do not trade emissions, but simply require participants to report them—use some version of the Protocol. This paper seeks to explain the success of WRI and WBCSD in creating the standard for GHG emissions accounting at the company level. Earlier work on financial accounting has shown that despite its technical nature, standardsetting is an inherently political process.1 The creation of the Greenhouse Gas Protocol (or more simply, “the Protocol”) is similarly political, involving negotiation and conflict among myriad actors—including states. Although the Protocol is a case of private regulation, the paper shows that states played an important role in its creation: Their inability to come to an agreement about the related issue of emissions trading created a regulatory vacuum, which non-state actors filled through the creation of the GHG Protocol. The paper contributes to the literature on private regulation in several ways. First, answering David Vogel’s call for more studies how and why “civil regulation” is established, this article contributes original research on a case of private rule-making not previously studied in depth.2 My analysis of the greenhouse gas accounting regime, moreover, not only adds to our understanding of private regulation but also contributes to the literature on environmental politics. As the climate regime expands and the value of carbon markets grows, issues of GHG measurement and standards will only become more important. The findings of my analysis suggest that private actors will continue to play a key role in the global governance of environmental issues. Second, I offer a conceptual and theoretical contribution to the literature on private regulation by introducing the notion of private entrepreneurial authority and analyzing the Protocol as an instance of such entrepreneurial authority. Building on previous work on private authority,3 I define private 1
Mattli and Büthe 2003; 2005. Vogel 2008. 3 Cutler et al. 1999; Haufler 2001; Hall and Biersteker 2002. 2
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entrepreneurial authority as: a set of practices that governs the behavior of actors in world politics without explicit delegation of authority by states. I use the case study of the Protocol to demonstrate a more general theory of private authority, which explains why these two NGOs were successful in attaining regulatory authority, and why firms and other actors decided to adopt their rules. I argue that the Protocol emerged as the standard for corporate-level greenhouse gas emissions accounting, because its creators were able to deliver three benefits to what Büthe calls the “targets of private regulation”4—reduced transaction costs, first-mover advantage, and enhanced reputation—not offered by other actors. Standardized “off the shelf” reporting procedures created by the Protocol made it relatively easy for individual firms interested in adopting voluntary reporting measures to do so. In addition, the Protocol provided technical support and ensured a consistent standard across actors. Adopting the Protocol also helped users prepare for international regulation of GHG emissions, potentially giving them a competitive advantage with respect to other firms. Although the Kyoto Protocol had yet to enter into force when the GHG Protocol was published in 2001, many firms believed that some form of climate regulation was likely; implementing GHG accounting was viewed as a way to begin to prepare for such an event. Finally, although primarily motivated by the threat of regulation, firms adopting the Protocol could also burnish their reputations as corporate citizens. Firms that adopted the GHG Protocol could position themselves as climate leaders (indeed, one program that adopted the GHG Protocol was called “Climate Savers”). The paper also explains the supply or form of private authority—that is, why we see entrepreneurship by NGOs, rather than delegation by states. Here, I argue that the inability of public authorities (governments or international organizations) to address an issue, combined with regulatory uncertainty (disliked by most targets) forecloses the delegation of regulatory authority and also creates an opening for entrepreneurial private authority. In the case of the climate regime, the most powerful states—EU and the so-called “JUSSCANNZ” negotiating bloc—had vastly different views on the appropriate role for emissions trading.5 Dissent among these states about the role of emissions trading, and thus, the possible uses of GHG emissions accounting standards took the issue of accounting methodologies off the agenda for inter-governmental cooperation and deprived the Secretariat of the UN Framework Convention on Climate Change (UNFCCC), the international public actor most likely to take on such as role, of any political mandate to do so. The UNFCCC Secretariat also did not have the 4
Büthe 2010. The JUSSCANNZ negotiating bloc is comprised of Japan, the United States, Switzerland, Canada, Australia, Norway and New Zealand. 5
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human resources to work on this issue. At the same time, many firms, including in JUSSCANNZ countries, expected that climate change regulation would surely be enacted sooner or later. For these companies, the uncertainty, created by governmental deadlock, about the form of such “inevitable” future regulation was undesirable. For them, the complete lack of public regulation meant continued uncertainty about the level of exposure, the risk of higher costs if large changes would have to be made quickly, and uncertainty about baselines, with the risk that undertaking voluntary efforts to lower their GHG emissions would put them at a competitive disadvantage rather than provide them with an opportunity to get financial as well as reputational credit for such efforts. Regulatory uncertainty thus provided a window of opportunity for the two NGOs, who were willing to supply (or more precisely, provide an institutional structure to foster) private regulation out of a genuine desire to reduce GHG emissions, even if in part only for reputational benefit. As a result, the WRI and the WBCSD were able to provide a set of benefits that were valued by various stakeholders, and thus induce deference from the variety of actors who adopted the Protocol. The paper proceeds in four parts. First, I present a primer on greenhouse gas (GHG) accounting. Since I cannot expect readers to be familiar with the GHG Protocol, I next provide an empirical account of the emergence of the Protocol. The third section maps my primary dependent variable—deference to private actors by states and non-state actors—by examining the uptake of the Protocol. In the fourth section, I return to the theoretical discussion above. I show that the emergence of the Protocol is consistent with a “supply and demand” model of private authority. Because of the divergent preferences of states, and the relative weakness of the likely focal institution, entrepreneurial NGOs were able to meet a demand for benefits that other actors were not. As a result, public and private actors around the world chose to defer to these rules, and adopted the Protocol to measure greenhouse gas emissions. 2. Primer on GHG Accounting and the GHG Protocol 2.1 GHG Accounting Greenhouse gas accounting provides a detailed and replicable report of the GHG emissions generated by a specific site or actor. The technical and scientific aspects of GHG accounting are complex, but two concepts must be introduced before discussing the specifics of the Protocol. First, like financial accounting, GHG accounting can be conducted either for voluntary or regulatory purposes. Firms may be required to file financial accounting reports with the government, but they also create them for purposes of planning and management. Similarly, GHG accounting can be voluntary or linked to a regulatory regime. Some firms Published by Berkeley Electronic Press, 2010
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choose to track their emissions in order to be transparent to their shareholders, or to reduce energy consumption. Others, like large power producers in the EU, are required by law to report their emissions levels, so governments can evaluate whether or not they are in compliance with regulations. The general term “GHG program” refers to both voluntary initiatives and regulatory programs that measure and report GHG emissions.6 Although many GHG programs are voluntary, they are widely viewed as the logical precursor to emissions trading. One cannot buy or sell emissions without first quantifying them; in this sense, many firms view GHG accounting as the first step in preparing for mandatory emissions trading.7 Second, just as financial accounts can be kept at the level of a project, firm or country, so can GHG accounting occur on multiple levels. GHGs are generally measured and reported at one of four different levels: national, corporate (or firm), facility or project. The Greenhouse Gas Protocol Initiative has developed two accounting standards, one at the corporate level and one at the project level. Corporate level accounting measures the emissions generated by the activities of a given firm, whereas project level accounting is used for calculating the emissions reductions generated by carbon offset projects, such as reforestation, wind farms or methane capture. This article focuses exclusively on the corporate standard, which was released in 2001, and has become the “gold standard” for corporate level reporting.8 The project standard, by contrast, was not released until 2005 and is generally believed to be less widely used. Any private firm, government agency or NGO that wishes to track its emissions uses a corporate accounting scheme. Corporate-level accounting requires deciding how to draw organizational boundaries. For firms with joint operations or subsidiaries, corporate accounting requires deciding how these sources will be measured.9 Moreover, corporate accounting also calls for the calculation of “indirect emissions” from purchased electricity use, as well as emissions generated from purchased materials, waste disposal, travel, etc.10 The key point here is that calculating and reporting at the corporate level is more complex than simply summing the emissions of projects or individual facilities. 6
WRI and WBCSD 2004, 98. This view is expressed not only in the document that constitutes the GHG Protocol, but also by a number of its users. 8 Author's interview with Rebecca Eaton, former Manager of World Wildlife Fund’s Climate Savers Program, Washington DC, 21 May 2009. 9 Choosing organizational boundaries involves deciding whether these boundaries will be drawn on the basis of equity share or control (either financial or operational) in a given operation. 10 At this point, methodologies for measuring indirect emissions beyond electricity use are still nascent. These so-called “scope 3” emissions could potentially include any activity that generates GHGs beyond those included in the direct and electricity categories. 7
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(Facility-level accounting measures emissions from a specific entity—such as a power plant, a paper mill or cement factory.) The Protocol does draw on earlier accounting methodologies at other levels—notably the Intergovernmental Panel on Climate Change Guidelines for National GHG Inventories (1996)—but it has also made a number of original contributions to the field of GHG accounting. 2.2 What is the WRI/WBCSD Protocol? The Protocol is a multi-faceted institution. It is at once a consultative standardsetting process, a conceptual framework, and a set of standards. I explain each of these aspects of the institution for two purposes. First, for conceptual clarity, I wish to acquaint the reader with the different functions of the Protocol. Second, for the analysis of the adoption of the Protocol in section 3, I need to be able to distinguish between its different components. The GHG Protocol Initiative is, first and foremost, a standard-setting process. It describes itself as “a multi-stakeholder partnership of businesses, nongovernmental organizations, governments, and others convened by the World Resources Institute and the World Business Council for Sustainable Development.”11 These two organizations convened hundreds of experts from business, government, and NGOs to create a methodologically rigorous standard. The process has dedicated staff at WRI and WBCSD, as well as partner institutions and public and private funders. The Protocol is also a framework for thinking about how to measure emissions. As one of the co-creators of the Protocol explains, “[t]he GHG Protocol corporate accounting and reporting standard is intended to be a ‘GHG GAAP’—the GHG equivalent of generally accepted accounting practices for financial reporting.”12 To this end, it has created a number of conceptual tools. For instance, the Protocol provides concepts for dividing up emissions into different “scopes.” Scope 1 emissions are those that come from sources owned or controlled by the company. Scope 2 includes those emissions that come from purchased electricity. Scope 3 subsumes all other indirect emissions (such as transportation or extraction of purchased materials). The concept of scopes has become pervasive in the language and practice of GHG programs. Another of the key conceptual contributions of the GHG Protocol has been to provide conceptual frameworks for thinking about how to decide which emissions to include or exclude in the accounting (known as equity vs. control boundaries), an allimportant issue for accounting at the corporate level. 11 12
WRI and WBCSD 2004, 2 Sundin and Ranganathan 2002, 141f.
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Third, the Protocol is a set of rules, comprised of three components: standards, guidelines and calculation tools. In order for a firm to state that it has conducted its accounting in accordance with the Protocol, there are a minimum number of requirements that it must meet.13 The authors of the Protocol signal that they use “shall” to specify required activities. In this sense, it is similar to treaty language that distinguishes between should and shall—activities that are recommended versus those that are required. However, the Protocol also suggests certain practices without requiring them. These guidelines range from recommendations about general principles to a specific how-to on gathering data and calculating emissions. One main author of the Protocol identified the “howto” guidance as a key contribution, walking new users through the process of creating a GHG inventory.14 Finally, the Protocol offers specific tools and formulae for calculating actual emissions. These include how to calculate emissions from activities such as combustion or energy use (applicable to all entities that use the Protocol) to “sector-specific” tools for aluminum, iron and steel, oil and gas, and other sectors. These calculation tools are peer-reviewed in the sense that they were developed collaboratively with expertise from the requisite sector. 3. The Emergence of the GHG Protocol WRI, WBCSD and the other organizations involved in the creation and vetting of the Protocol were not the first to develop procedures for measuring greenhouse gases. Indeed, as the discussion below illustrates, states and international organizations were early actors in the creation of national and project-level measurement tools. However, efforts to develop a corporate-level tool did not advance until private actors became involved. In this section, I briefly review earlier efforts to measure and report GHG emissions and offsets, showing that the GHG Protocol was one of the earliest efforts to develop a firm-level accounting tool, and was certainly the most transparent.15 The expertise concentrated within the Protocol process is a key factor in understanding its uptake. The Protocol process was, quite simply, the first effort to bring together actors with experience 13
Note that the Protocol is voluntary, so there is no monitoring of compliance, nor sanction for non-compliance. Some organizations choose to have their GHG reporting independently audited, but this is not required by the Protocol. 14 Author's interview with Michael Gillenwater, former EPA official, Washington DC, 21 May 2009. 15 I use “firm-level” and “corporate-level” interchangeably for standards that seek to provide measures of GHG emissions at the level of aggregation of a firm, whether or not it is legally a corporation. Offsets are activities that remove GHGs from the atmosphere. As mentioned above, these are specific projects such as reforestation activities or installation of solar panels which require a separate set of measurement tools than those aimed at firm-level accounting. http://www.bepress.com/bap/vol12/iss3/art3 DOI: 10.2202/1469-3569.1318
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and knowledge about corporate-level GHG accounting. As the discussion below illustrates, the little pre-existing knowledge about corporate level accounting was scattered across numerous firms, governments and other organizations. WRI and WBCSD were the first to pool the resources of these actors through a multistakeholder consultative process. Early GHG measurement efforts began in 1995, when the Intergovernmental Panel on Climate Change released GHG inventory guidelines. The Framework Convention on Climate Change (FCCC) requires Annex I countries—those with binding targets under the Kyoto Protocol—to report annually on their emissions in six sectors: energy, industrial processes, solvents, agriculture, land use and land use change, and waste.16 The IPCC guidelines are to be used by Annex I countries when calculating their national level emissions. These guidelines are widely used for calculating emissions within a national territory.17 The same year, the Parties to the FCCC agreed to undertake a pilot program called “Activities Implemented Jointly” (AIJ), whereby states could experiment with carbon offset projects.18 Although it was agreed that states could not earn credits for these pilot projects, the prospect of project-based credits raised awareness about the need for measuring the amount of carbon removed in different types of offset activities. As experiments with offset projects began, so did work on measuring them. In 1997, a working paper drafted by the Lawrence Berkeley Laboratory in the US cited seven existing protocols and guidelines, created by governments, IOs, NGOs, and private firms.19 These protocols and guidelines represented various attempts to measure and report on different types of offset projects. Most of them were rudimentary at best. The Uniform Reporting Format created by the UNFCCC was little more than a two page questionnaire to describe the activities of the offset project. The key event of that year was the signing of the Kyoto Protocol, which institutionalized the practice of carbon offset projects, making the need for well-developed measurement tools quite urgent. Thus, by 1997, there was considerable activity surrounding GHG measurement. However, almost all of it was related to intergovernmental agreements, with states as the primary actors. Moreover, these efforts were focused almost exclusively on the national and project-levels, and developed only very basic tools. The only evidence of comparable efforts to develop comparable methodologies GHG measurement comes from BP. 16
UNFCCC 2006. IPCC 1996. 18 UNFCCC 1995. 19 Vine and Sathaye 1997, 8-16. 17
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The first efforts to undertake GHG accounting at the corporate level began in 1997, when BP announced an ambitious plan to create an internal emissions trading program The goal was to reduce BP’s emissions by 10% below 1990 levels by 2010. However, before trading could begin, BP had to develop a system for measuring and reporting. Victor and House describe these initial steps: Until the decision to pursue the ETS, the company had no uniform standard for reporting greenhouse gas emissions. BP developed a CO2 reporting protocol within months of Browne’s speech [announcing BP’s new initiative], and by the end of 1997 had inventoried GHG emissions for 1990, 1994, 1995, and 1996…The lack of reliable inventories was normal in the industry at the time.20 Thus, the BP experiment was not only the first in corporate-level emissions trading; it was necessarily one of the first in corporate-level emissions measurement. As BP was implementing its pilot trading scheme, other organizations began to recognize the need for a corporate level emissions reporting scheme. Shortly after BP announced its plans, four would-be members of the future WRI/WBCSD Protocol called businesses to action for the same purpose.21 BP, along with Monsanto, General Motors and the World Resources Institute (WRI) published “Safe Climate, Sound Business: An Action Agenda” in October 1998. The document challenges businesses to address their contributions to climate change and “[to] measure, track, and openly report greenhouse gas emissions from their operations.”22 Moreover, the signatories to the document pledge to cooperate to “develop a joint protocol for measuring and reporting greenhouse gas emissions and the eco-efficiency of our global operations.”23 The steps for action set forth in “Safe Climate, Sound Business” laid the foundations for the Greenhouse Gas Protocol. NGOs and firms alike had identified the need for such a tool, and the existing expertise was minimal. Only a few forward-looking firms and NGOs had any experience with measuring GHGs at the firm level, and even these efforts were fairly new. Since existing experience on corporate-level accounting was minimal, early movers had an opportunity to shape measurement rules and practices. Although there was no guarantee that such rules would become binding, many firms felt that a proactive stance was a way to avoid undesirable regulatory outcomes. One former representative of the WBCSD who was involved in the early stages of the 20
Victor and House 2006, 2102, emphasis added. Monsanto was not involved in the consultations and drafting of the GHG Protocol. 22 The Climate Protection Initiative 1998, 6. 23 The Climate Protection Initiative 1998, 16. 21
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Protocol noted that their input at the early stages of developing a measurement tool was a much easier way to shape future rules. He noted, “If you [i.e. the business community] don’t do anything and just leave it to the regulators, you’re stuck with whatever comes out.”24 By contrast, he noted, it is “much easier to influence regulation at the early stages [than to] undo something that’s already been presented.”25 To follow up on the pledge laid out in “Safe Climate, Sound Business,” WRI began talking to leaders in business, as well as NGOs and government actors. It did not want to present a measurement protocol as a fait accompli, but rather wanted to create a consultative multi-stakeholder process both to produce a rigorous product, and to cultivate future users of the Protocol. It soon discovered that the WBCSD had a similar initiative in mind. After some discussion, each organization realized that “two different efforts [were] tantamount to a distandard.”26 Each side realized that the other had something to bring to the table. WRI provided a considerable amount of technical expertise; WBCSD had extensive reach into the business world via its membership. These members were potential users of the Protocol. Moreover, each side realized that the legitimacy and credibility of any measurement scheme would be greatly enhanced by having both NGOs and industry groups involved. One representative of the WBCSD noted that there was suspicion on both sides at the outset, but there was also agreement on the need for a “quality product”27 as well as something that was “implementable.”28 Both of these goals could be achieved through a rigorous, transparent and participatory rule-making process. The cooperation between WRI and WBCSD did not occur seamlessly. Despite initial wariness, there were three factors that facilitated their collaboration. First, all major participants in the process stressed the importance of the deliberative process. This commitment to deliberation and revision addressed the concern that some views might not be adequately considered, and that the end product would favor one group of interests over another.29 Because participants felt that all points of view were seriously discussed, there was less reason for one group to “take their ball and go home” by starting a competing 24
Author's interview with Dave Moorcroft, former Director, Climate and Energy Programme, WBCSD, 17 November 2009. 25 Author's interview with Moorcroft. 26 Janet Ranganathan, World Resources Institute. Interview by author, Washington DC, 19 May 2009. 27 Author's interview with Moorcroft. 28 Author's interview with Antonia Gawel, WBCSD, 8 November 2008. 29 Author's interview with Ranaganathan; Pankaj Bhatia, Director, GHG Protocol (Washington DC, 11 November 2008) and with Rob Frederick, former Manager of Corporate Social Responsibility, Ford Motor Companies, 8 May 2009.
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standard. Second, particularly at the early stages of the process, the participants—including those from the private sector—were largely leaders (or aspiring leaders) on climate change. This self-selecting group was committed to creating a meaningful outcome—a workable standard—rather than creating a lowest common denominator standard. To promote good-faith negotiation, members of the Protocol participated in their individual capacity. As a result, people did not simply negotiate on behalf of their organization, but rather focused on contributing their expert knowledge to the process30 This is not to say that the discussions were not without contention, but that that they were governed by good-faith negotiation to create a rigorous methodology rather than one that would favor certain groups. Third and finally, the vision for the final corporate standard was to create a framework for GHG accounting, in which individual users could use only the parts they wanted, or that suited their objectives. In other words, the Protocol was not designed to be an “all or nothing” standard. While basic elements are required to maintain the intent of the standard, there was some degree of flexibility in its application. Understandably, this lowered the stakes for many groups; if certain non-essential parts of the standard were objectionable, they could simply choose not to implement them. With this common ground in mind, WRI and WBCSD agreed to join forces rather than create competing standards. Since WBCSD had a large member base of multinational firms, one of its key contributions was to ensure participation and support from the private sector. These efforts were important in two ways. First, many WBCSD members expressed interest in the process, and a number were willing to contribute funds and/or staff time to developing the project. Second, by bringing these corporate actors into the fold, and encouraging their input and buy-in, WBCSD helped prevent the creation of a competing standard promulgated solely by business interests. Another important development in consolidating the authority of the WRIWBCSD collaboration occurred in 2001, when the EPA became a major funder and participant.31 Given the uncertainty surrounding US regulatory responses to climate change, the EPA’s involvement served to reassure firms that the Protocol’s rules would be taken seriously by the US government. This further reinforced the perceived legitimacy and potential high level of future usefulness of the Protocol to business groups, lowering the payoff of creating a competing standard. Importantly, the EPA also pledged to use the Protocol in its own voluntary reporting program—again demonstrating recognition of the Protocol by the government. Moreover, a number of other core advisors to the Protocol were heavily involved with separate efforts to create trading schemes and/or measurement protocols. The process convened by WRI and the WBCSD 30 31
Author's interview with Ranganathan. Author's interview with Cynthia Cummis, former EPA official, Washington DC, 19 May 2009.
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provided a natural focal point for these various efforts. Other funders of the Protocol include: the Alcoa Foundation, British Petroleum, the US Agency for International Development and a number of charitable foundations.32 WRI and WBCSD also fostered commitment to the new standards by setting up the creation of the Protocol as an extensive multi-stakeholder process. One member of the project management team described it as “a big tent initiative,” where anyone who was interested could participate. When the first edition of the Protocol was published in September 2001, it listed over 300 contributors from some 200 organizations.33 Through the drafting process, many participants became invested in the implementation of the Protocol. As one member of the WRI project team put it, “it [the GHG Protocol] became theirs too.”34 In short, the multi-stakeholder process was a key strategy for building constituencies for the Protocol.35 WRI and WBCSD also employed other strategies to build these constituencies and commit future users to the Protocol. After the first draft was completed, a number of firms agreed to “road-test” the Protocol, to see what worked and what did not.36 Their experiences not only resulted in improving the final product, but also in creating more users. Preliminary drafts were also peer reviewed by accounting firms and KPMG, to ensure consistency and replicability.37 Similarly, WRI and WBCSD worked with a number of industry associations, to help tailor the Protocol to specific sectors such as aluminum, cement, wood products, etc. There are now a dozen such tools, many of which have become standard for the industry. These iterative reviews had three beneficial effects: they improved the quality of the standard, increased the legitimacy of the process, and created buy-in among participants. All of these efforts helped prevent the creation of a competing standard. However, success is not merely measured by the absence of competition; we must also look at the breadth of the Protocol's adoption. It is to this task that we now turn. 4. Mapping the Dependent Variable: Deference to the Process and the Standard The definition of private authority provided earlier is purposefully broad about which actors in world politics must defer to private actors in order to create 32
GHG Protocol Initiative 2010. World Resources Institute and World Business Council on Sustainable Development 2001. 34 Author's interview with Ranganathan. 35 This is consistent with Bernstein and Cashore (2007), who describe a support-building phase for non-state market driven governance systems. 36 For a similar phenomenon in financial accounting standards, see Mattli and Büthe 2005. 37 GHG Protocol Initiative 2001. 33
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private authority. Any actor who defers to privately-created rules or standards without coercion creates an instance of private authority. Whereas delegated private authority requires that states transfer authority to private actors, the same does not hold for entrepreneurial authority. When one set of actors defers to private actors who seek recognition as rule-makers, entrepreneurial private authority is created. Entrepreneurs may only persuade a few like-minded actors to defer, or the uptake of their rules and practices may be very widespread. In this section, I show that deference to the Protocol’s standards has been widespread: Numerous GHG registries have adopted the Protocol, as have pilot programs, industry organizations and even one emissions trading scheme. One might argue that the widespread deference to the Protocol does not demonstrate private regulatory authority, but is simply “business as usual” for those who adopt it. I submit that adoption of the Protocol is evidence of power as defined by Dahl: WRI and WBCSD convinced other actors to do something that they would not have otherwise done.38 I maintain that adopting the Protocol involves real, measurable costs. Implementation requires purposeful and sustained action: choosing organizational boundaries, setting a baseline to compare emissions over time, identifying and calculating emissions, gathering company-wide data, and assessing the accuracy of the data collected. In other words, we can be confident that adopting the Protocol requires meaningful and costly changes in the behavior and practices of those who defer. The Protocol has induced deference in various sets of actors in different ways. I operationalize deference in three ways. First, I trace the adoption of the GHG Protocol by examining which reporting registries and emissions trading schemes have adopted some or all of the Protocol in their measurement and reporting methodologies.39 I chose to examine all extant trading schemes and four of the largest reporting schemes and evaluate the extent to which they adopt various components of the Protocol.40 Second, to provide a fuller picture of the deference to the WRI/WBCSD-led process, I supply additional evidence 38
Dahl 1957, 202f. Figuring out who has adopted the Protocol is a difficult matter. The GHG Protocol website lists those users who either use the Protocol or whose own measurement scheme is compatible with the Protocol. However, it does not distinguish between these two. I have tried to triangulate, by consulting not only with the GHG Protocol staff, but also with staff at relevant reporting schemes to ask them about the extent to which they rely on the WRI/WBCSD Protocol for their own reporting requirements. Because of the timing of the creation of the registries—they were all created after the publication of the Protocol—I can be fairly confident that this is not simply retroactively identifying registries as Protocol-compatible. 40 The trading schemes were selected on the basis of trade volume as listed in Capoor and Ambrosi 2008. The voluntary reporting schemes were selected on the basis of the number of participating firms and the geographical breadth of participants, as well as information gleaned from interviews about which reporting programs are most widely used. 39
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illustrating its influence over other actors. I examine the involvement of the GHG Protocol as an institution in discussions surrounding the creation and design of other accounting and trading programs. Third and finally, I provide anecdotal evidence showing that participants in the Protocol process were able to influence the position of previously resistant actors, to adopt the Protocol as well as a proactive strategy toward GHG measurement. Before turning to the specific programs that have adopted the Protocol, some discussion of the universe of cases is in order. Unfortunately, it is infeasible to generate a complete list of all firms that measure and report their emissions, and then calculate the percentage that have adopted the Protocol. However, a review of the corporate users (as listed on the GHG Protocol’s website) shows that 18% of US Fortune 100 companies have adopted the Protocol, as have and 12% of the Global Fortune 100. Moreover, the Carbon Disclosure Project (see below) reports that in 2007, 77% of FT500 companies report their carbon emissions.41 Over half of the firms reporting through the Carbon Disclosure Project use the Protocol.42 This is a rough measure, but it provides a sense that the adoption of these rules is not limited to a few firms on the margins of the private sector. Estimating the proportion of GHG registries that use the Protocol (or are based on the Protocol) is more challenging since there is no established list of all extant registries. To define the universe of cases, I began with the list of Protocol users listed on the GHG Protocol website.43 I supplemented this list with web searches and references to other registries in the literature and in websites about carbon accounting. In sum, I tried to establish as complete a list as possible using multiple sources. Virtually every registry in the set of cases I compiled has either adopted the Protocol; created its own methodology based in whole or in part on the Protocol; recommends using the Protocol (or another methodology based on it); or states that its method for measuring GHG emissions is “consistent” with the Protocol. There were a number of programs that are merely “compatible with” the Protocol; these were excluded from the list of adopters (see Table 1 below). I also excluded programs that focus primarily on one type of energy provision or 41
Riddell and Chamberlin 2007. The 50% figure was provided by Joanna Lee, Carbon Disclosure Project, via email communication. 43 This list is available at http://www.ghgprotocol.org/standards/corporate-standard/users-of-thecorporate-standard. Accessed 24 November 2009. I recognize that beginning with the list generated by the GHG Protocol introduces the possibility of overestimating the number of registries using the Protocol. However, this is the most comprehensive list in existence, thus I would be remiss to exclude it. I have tried to correct for any potential bias by triangulating with other sources, and by setting a stringent standard for what constitutes adoption, as described on the following page. 42
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carbon offset projects. In other words, to calculate the share of registries that have adopted the Protocol, I have focused only on registries (as opposed to other types of carbon management or abatement methodologies), and I set a stringent standard for those that I designate as Protocol-adopters. Despite using these strict criteria, I found a high level of uptake of the Protocol. From these findings, one can infer that the Greenhouse Gas Protocol is the standard for corporate-level measurement. Currently, there are no truly competing standards. The one other corporate-level GHG accounting standard that exists was created by the UN Environment Program in 2000.44 The UNEP GHG Indicator and the Protocol had considerable overlap in their timing. The UNEP GHG Indicator was first conceptualized in 1997, and released in 2000; the Protocol began in 1998 and was released in 2001. The UNEP GHG Indicator was not intended to serve as a substitute nor a complement to the Protocol, but rather was to be a “stand-alone” tool for users that might not have the capacity to implement the more complex Protocol.45 The intended users were small and medium-sized enterprises with a preference for an internal management tool, rather than an external reporting standard. However, according to one of its creators, it was never widely publicized, and UNEP only takes minimal steps to update it. Evaluating the universe of cases of emissions trading schemes is much more straightforward; of the seven functional schemes, one uses the Protocol (see Table 2). As I discuss below, only one emissions trading scheme decided to measure emissions at the corporate level. Given that the decision about the level of aggregation (corporate, facility or national) is prior to the selection of the measurement standard, the conclusions to be drawn from this fact are mixed. In sum, the distribution of uptake of the standard is varied, with the highest concentration by far taking place in voluntary registries. I turn now to the specifics of adoption rates in GHG registries and emissions trading schemes.
44
See http://www.uneptie.org/energy/information/tools/ghg/. Author's interview with Mark Radka, UNEP Division of Technology, Industry and Economics, 14 April 2009. Although one of its creators states that the intended targets of the UNEP GHG Indicator were different than those of the Protocol, one cannot help but notice that the former has had little traction with users. If the creators truly aimed to provide a simpler tool to a different audience, it is unclear why the Protocol would have prevented them from doing so. The fact that the GHG Protocol was successful while the Indicator was not suggests that the Indicator was, in reality, an unsuccessful attempt at creating a new standard.
45
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4.1 Adoption of the Protocol in GHG Registries GHG registries are related to, but distinct from, emissions trading schemes in that they are not a requirement by domestic or international regulation, and generally are not linked to the purchase or sale of emissions allowances. Most are used for the purposes of voluntary reporting. Although some have government participants, almost all are run by private actors. More importantly, unlike emissions trading schemes, which tend to focus at the facility level, the majority of registries use corporate-level reporting. Space constraints preclude a detailed discussion of all of the GHG reporting programs that have adopted the Protocol as (or as part of) their emissions accounting methodologies, but Table 1 provides an overview of the main programs by sector. Importantly, some 25 major reporting programs worldwide use the Protocol, including four key programs: the standard promulgated by the International Organization for Standardization (ISO), the Carbon Disclosure Project, the North American-focused Climate Registry, and the US-based Climate Leaders program. In the remainder of this section, I briefly describe these, two of which are global and two of which operate in the US. By far the biggest success of the Protocol has been its wholesale adoption by ISO. ISO is a network of national standards institutes which creates standards for a vast range of products and processes. After the release of the GHG Protocol in 2001, ISO proposed developing its own methodology. Despite the fact that a number of firms, NGOs and reporting programs were beginning to use the Protocol, ISO was still determined to create its own measurement standard. Those involved in the negotiations with ISO have differing explanations of its desire to create its own scheme. Two participants in the process attributed ISO’s insistence on a separate standard to the active participation of the oil and gas industry, which was generally opposed to action on climate change, let alone the adoption of a measurement scheme created without their input.46 Another key participant attributed ISO’s reluctance to adopt the Protocol to their “mind set [and] mental model” as well as the “defensive behavior of the ISO organization.”47 In an effort to prevent the creation of a competing scheme, participants of the GHG Protocol sought out the ISO and tried to persuade them to adopt the extant standard as their own. A protracted set of discussions between ISO and the main authors of the Protocol followed. Unfortunately, because the documents from ISO meetings are not available, a detailed account of the negotiations is not feasible. However, it is clear that members of the Protocol steering group were very active in the ISO negotiations throughout the process of creating the ISO 46 47
Author's interviews with Ranganthan and Bhatia. Author's interview with Moorcroft.
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standard. There was considerable resistance by ISO members to the Protocol.48 This suggests that members of the Protocol worked to maintain the integrity of the standard that they had created, and did not simply turn over their work to the ISO to use as it pleased. In a newsletter to Protocol participants, WRI announced that the Protocol would be used as the core document from which the ISO standard was created.49 The bargaining between WRI, WBCSD and the ISO about how much of the Protocol would be used in the ISO standard suggests that the departure point for the negotiations differed considerably from what would have occurred had the ISO created its own standard from scratch. The Protocol used its support from WBCSD and the business community to persuade ISO that establishing a competing standard would be a disservice to all.50 Many of those involved in the process of drafting the Protocol became vocal supporters, and thus, persuasive ambassadors to skeptics within the ISO. After approximately five years of negotiation, ISO finally adopted a standard for GHG measurement and reporting that is almost identical to the Protocol, called ISO14064, Part 1.51 At the same time, it signed a Memorandum of Understanding with WRI and WBCSD, with each organization pledging to promote the standards created by the other.52 Thus, the ISO has deferred to the methods set forth in the Protocol, and has re-packaged them as their own. Given the ISO’s broad reach and high level of legitimacy among business and industry, its decision to adopt the Protocol has translated to a much wider reach to these communities. A second global user of the Protocol is the Carbon Disclosure Project (CDP). An independent non-profit organization, the CDP collects data on GHG emissions on behalf of institutional investors. CDP is organized on the principle that investors are in a better position to evaluate the risks and potential areas for improvement of the companies they invest in if they know their emissions and exposure to future regulation. In 2008, 1550 companies provided GHG emissions data to the CDP, representing US$57 trillion in investor assets.53 The Carbon Disclosure Project relies on participating companies to report their emissions in a manner that is transparent, rigorous, and compatible with its program. Although it does not require a particular GHG accounting methodology, it strongly recommends that participants use the Protocol created by WRI and WBCSD. One interviewee at CDP reported that over 50% use the Protocol in responding to the survey. She added that the Protocol was chosen because “it has international 48
Author's interviews with Bhatia, Moorcroft, and Ranganathan. GHG Protocol Initiative 2003. 50 Both WRI and WBCSD were, and continue to be, recognized as “organizations in liaison” with Technical Committee 207, the ISO committee responsible for drafting ISO-14064 Part 1. See http://www.iso.org/iso/iso_technical_committee?commid=54808. Accessed 7 July 2010. 51 The primary difference is that ISO requires third party verification, which the Protocol does not. 52 See http://www.iso.org/iso/pressrelease.htm?refid=Ref1093. 53 Carbon Disclosure Project 2008. 49
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recognition as being thorough and robust, and we believe it to be the most appropriate.”54 There are two key adopters of the Protocol in the US that also demonstrate the breadth of deference. The first is the US EPA’s voluntary reporting program, called Climate Leaders. Climate Leaders was created in 2001 to help participating companies to measure and reduce their GHG emissions. Like ISO14064, Climate Leaders adopted the Protocol in its entirety. It became involved in the early consultations about creating the Protocol, and decided to fund the initiative as well as to use the newly-created standard in its own program.55 The EPA had three motivations for using the Protocol. First, existing voluntary reporting protocols developed by the US Department of Energy (DoE) did not provide a useful model, since they were focused on project-level, rather than corporate-level reporting.56 Thus, at the time, there were no other models to draw upon—save for the process emerging from WRI and WBCSD. Second, the international reach of the standards was appealing. Because multinational corporations were the primary target market for Climate Leaders, using an international standard such as GHG Protocol assured compatibility with other users, and facilitated consistent accounting practices across world-wide operations of a given company. Third and finally, the transparency and inclusiveness of the GHG Protocol process bolstered the legitimacy of the standards and helped to ensure buy-in from a broad range of stakeholders. Climate Leaders has waned in importance since its creation in 2001, and as US climate policy has moved toward compliance-based policies such as the Regional Greenhouse Gas Initiative. However, Climate Leaders’ use of the Protocol was a significant contribution to its widespread uptake. The EPA’s funding and adoption of the Protocol lent legitimacy to the efforts of WRI and WBCSD: Given the active support of future regulators, potential users of the Protocol saw the value of getting a seat at the table.
54
Joanna Lee, email communication, 14 April 2009. Author's interview with Cummis. 56 Author's interview with Cummis. 55
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Table 1: GHG Programs using the Protocol Voluntary Governmental Initiatives
Industry Associations and Non-Governmental National Industry Initiatives Initiatives
Other Initiatives
US EPA Climate Leaders Program
International Aluminum Institute
ISO 14064-Part I
WWF Climate Savers
The California Climate International Council for Carbon Disclosure Program United Nations Action Registry Forest and Paper Association GHG Calculator The Climate Registry WBCSD Sustainable Cement Initiative
Carbon Trust Standard
Mexico GHG Program World Economic Forum Global GHG Register
Business Leaders Initiative on Climate Change
China Corporate International Petroleum Energy Conservation Industry Environmental and GHG Management Conservation Association Program
Climate Neutral Network
Brazil GHG Protocol New Zealand Business Program Council for Sustainable Development India GHG Inventory Taiwan Business Council for Program Sustainable Development Philippine Greenhouse Association des entreprises Gas Accounting and pour la réduction des gaz à Reporting Program effet de serre Australian National Greenhouse and Energy Reporting Guidelines Canadian GHG Challenge Registry New Mexico GHG Emissions Reporting57
58
Unlike the other initiatives in this column, the New Mexico initiative is mandatory for large emitters (i.e. <25MW), oil refineries and cement manufacturers. Reporting from other emitters is voluntary. Certain participants in the New Mexico program may use the Climate Registry or the California Climate Action Registry, both of which are very similar to and drawn from the WRI/WBCSD Protocol. See http://www.nmenv.state.nm.us/aqb/ghg/documents/FAQ_GHG_Emissions_Reporting.pdf for more information.
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Finally, the Climate Registry is a voluntary GHG program used by organizations in 40 US states, 6 Mexican states and 11 Canadian provinces and territories, as well as four Native Sovereign Nations. It is a non-profit organization whose goal is to promote the use of a single set of measurement tools to calculate, report and verify GHG emissions and to establish a common data infrastructure for reporting.58 Its members include firms, NGOs, local and state governments and public utilities. The Climate Registry states that it draws on four sources in the creation of its own measurement protocol: the WRI/WBCSD GHG Protocol, ISO-14064, US EPA Climate Leaders and the California Climate Action Registry. Since the California Climate Action Registry has also adopted the Protocol, all of the methodologies that contributed to the Climate Registry’s methodology are products of the Protocol. The geographic breadth of the Climate Registry, as well as its position that any federal GHG regulation should use its accounting and calculation methodologies shows the broad uptake of the Protocol, and the potential for even more expansion. 4.2 Adoption of the Protocol in Emissions Trading Schemes Currently, there are seven emissions trading schemes in their operation phase, as defined by Betsill and Hoffman’s extensive work on the universe of emissions trading schemes.59 Table 2 lists them in the order of their size, as measured by the volume of 2008 trades.60 A first glance at the table suggests that the adoption rate of the Protocol is low—only one in seven. However, such a conclusion presupposes that each trading scheme makes the choice about the level of aggregation (national, facility, corporate) simultaneously with the choice of measurement standard. In fact, this is not the case. Rather, the first choice in designing such an international institution is the level of aggregation, followed by the choice of measurement standard for the chosen level of aggregation. Put another way, only one emissions trading scheme has opted to conduct trading
57
More information on The Climate Registry, including a detailed list of members, is available at http://www.theclimateregistry.org/. 59 Betsill and Hoffman 2009. According to their work, there are 26 additional schemes that are either now defunct or are in the preliminary planning stages. I exclude the former because many were created before the Protocol was published, and thus are not plausible candidates for adopting it. I exclude the latter because they have yet to create specific rules about accounting and reporting. The universe of cases for my analysis is thus comprised of seven cap and trade schemes. 60 Capoor and Ambrosi (2009). Very little has been written on the Japan Voluntary Emissions Trading Scheme, which includes only a handful of electricity generators. Japan is currently transitioning to a larger pilot program, which is also voluntary.
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among firms (rather than say, nation states or facilities); once it did so, it selected the Protocol as its measurement standard. Table 2: Emissions Trading Schemes, by trade volume Trading scheme European Union Emissions Trading Scheme Clean Development Mechanisma Chicago Climate Exchange Regional Greenhouse Gas Initiative New South Wales Japan Voluntary Emissions Trading Scheme New Zealand
Volume of CO2e traded (millions of tons) 3,093 463 69 65 31 Data not available Data not available
Level of reporting Facility Project Corporate Facility Facility Facility Facility
a. Primary market transactions only, includes Activities Implemented Jointly and voluntary transactions.
The Chicago Climate Exchange (CCX) is a voluntary, but legally-binding program to reduce and trade greenhouse gas emissions among North American firms. Credits are earned through abatement projects and then can be traded among its members. In Phase II, which runs from 2007-2010, members commit to reduce emissions 6% below a baseline level. The baseline can be either the average of annual emissions between 1998 and 2001 or the single year 2000. Allowances are allotted to each member equal to the emissions reduction target. Members that do not meet their annual target are required to buy allowances equal to the amount of the overage. The CCX has been growing rapidly; between 2006 and 2007, its trading volume increased by more than 100%, and the value of permits traded almost doubled. By the end of 2008, the market was valued at US$309 million—more than a four-fold increase from the previous year.61 The paucity of trading schemes at the corporate level raises a broader question about the applicability of the Protocol to compliance-based trading. The general perception is that corporate-level reporting is not well-suited for compliance-based trading.62 Because judgments are required to decide which emissions should be included and excluded for a given organization’s report, possibilities of double-counting arise. As the Protocol notes: “whether or not double counting occurs depends on how consistently direct and indirect emissions are reported.”63 The possibility of double-counting raises two challenges for GHG markets. First, the overall amount of emissions may be inflated due to inaccurate 61
Capoor and Ambrosi 2009, 1. Several interviewees confirmed that this is a widely-held view, though it was not necessarily clear when discussions about corporate based accounting first began. 63 WRI and WBCSD 2001, 21. 62
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counting. Second, two companies could potentially claim ownership of the same “piece” of emissions. Both problems would impede the proper functioning of a trading market. For this reason, “compliance regimes are more likely to focus on the ‘point of release’ of emissions”—that is, when a given ton of GHG can be physically tied to its producer at the facility level.64 Since the Chicago Climate Exchange is a voluntary market, which has no mandate to account for all emissions, issues surrounding double-counting are less pertinent. However, this observation does not render corporate accounting entirely irrelevant for regulation; indeed, the US EPA has recently signed a rule requiring large emitters to report their GHG emissions.65 Some of these would be required to report at the corporate level; the same is true in the state of New Mexico. In the EU, the accounting methods for cement production are consistent with the sector-based tool developed by cement firms and the GHG Protocol.66 Moreover, as the EU moves forward with its trading scheme, it has been relying upon the existing cement sector tool to establish benchmarks for future allowances. In a word, there have been some regulatory applications of the Protocol. Nonetheless, as the following section will illustrate, the majority of actors that have adopted the Protocol do so for voluntary GHG registries. 4.3 The Broad Authority of the Protocol As stated earlier, tracing the number and size of the organizations that have adopted the Protocol gives an incomplete picture of the authority of the Protocol as an institution. In addition to persuading others to adopt the rules it created, the Protocol as an institution helped shape other discussions of GHG measurement and reporting in three ways. First, GHG Protocol senior staff served as technical advisors to a number of GHG programs as they were being created.67 Although in many cases, new registries intended to adopt large parts of the Protocol, many also sought to have requirements that departed from the Protocol in various ways.68 Thus, staff at WRI and WBCSD worked closely with the California Climate Action Registry 64
WRI and WBCSD 2001, 21. US Environmental Protection Agency 2009. 66 Author's interview with Bruno Vanderborght, Senior Vice President of Climate Protection, Holcim Industries, 26 November 2009. 67 Information on the ongoing interactions between the GHG Protocol and these various other programs and trading schemes is documented in regular updates of the Protocol’s newsletter. These details are drawn from seven years of newsletter updates, available at http://www.ghgprotocol.org/newsletter/newsletter-archives. 68 For example, the Climate Registry adopts much of the reporting requirements and standards set forth in the Protocol, but also requires certain facilities to report their emissions—a measurement standard not included in the Protocol. 65
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(now part of the Climate Registry) and the ISO, as each worked to create a reporting methodology based on the WRI/WBCSD Protocol, to make sure that additions or amendments did not impede the functioning of the adopted parts of the Protocol. Staff from the Protocol has also been involved in the discussions around the Regional Greenhouse Gas Initiative (RGGI), the only government-sanctioned compliance-based emissions trading scheme in the US. It has played a similar role in the Western Climate Initiative, which is in the process of creating an emissions trading scheme in the Western US and Canada, and in early discussions of the governors in Midwestern states in the US to reduce GHG emissions. Neither RGGI nor the Western Climate Initiative could adopt the Protocol wholesale, since both have chosen to conduct reporting at the facility, rather than the corporate level. However, Protocol staff worked closely with RGGI on a sector-based tool for stationary combustion, as well as on verification and software issues. Protocol staff at WRI and WBCSD have also provided technical expertise to the US Department of Energy’s voluntary GHG reporting program as it sought to revise its guidelines; the new version is now consistent with the Protocol. Protocol staff also consulted on discussions of monitoring and reporting requirements during the design phase of the EU-ETS. Like RGGI, the EU-ETS requires measurement and reporting at the facility level; the Protocol is therefore of limited applicability. However, in the case of the now-defunct UK-ETS, methods for estimating emissions from electricity use and joint ventures relied heavily on the Protocol.69 Thus, in each of these cases, registries and trading schemes developing measurement standards sought out and deferred to the expertise of staff at the GHG Protocol. Second, the Protocol helped facilitate a shift from no action on climate change to various efforts to measure GHG in two previously resistant groups of actors—energy-intensive industries and large developing nations. Both the production of cement and many of the production processes used in the chemical industry70 are extremely energy intensive, and thus produce considerable GHG emissions. Many cement firms have mobilized against domestic legislation on GHG emissions because of the heavy costs that the industry would incur. One firm—Holcim—has been decidedly ahead of the curve. It began considering the possibility of monitoring its GHG emissions in 1999.71 A quick internal survey of Holcim holdings revealed seven different methodologies for measuring emissions, each of which yielded widely varied calculations for the same activities. Upon discovering the work of the Protocol, and seeing the large gap between Holcim’s work and the emerging Protocol, Holcim opted to work with WRI and WBCSD, 69
Author's interview with Ranganathan. I thank an anonymous reviewer for pointing this out. 71 Author's interview with Vanderborght. 70
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both because of their reputations, and “to facilitate further acceptance by other cement companies and other organizations.”72 The early work undertaken by Holcim was thus incorporated into the standards developed through the Protocol process. The involvement of Holcim as one of the core advisors in the GHG Protocol, and its commitment to implementing the standard resulted in two important outcomes. First, the Protocol created a sector-based tool (released in 2002), tailored specifically to the needs of the cement industry. Second, Holcim spent considerable time and energy refining the tool, and then promoting it within the industry. In 2002, eleven cement firms agreed to “road test” the tool, and revisions were made based on their experiences. In addition, Holcim was involved in the creation of the Cement Sustainability Initiative, which requires signatories to use the Protocol. It has also conducted an extensive capacity building campaign in developing nations to help firms implement the measurement and reporting standard. The result of all of these activities is that the cement sector version of the Protocol is used in nearly 100% of cement production in the US and EU, and 65% in Latin America. Globally, the adoption rate is estimated to be near 65%, not including China.73 These efforts have not been without objections. Bruno Vanderborght, Senior Vice President of Climate Protection at Holcim, was a core advisor to the first draft of the Protocol. He noted that a number of firms in Asia have resisted adopting the Protocol, in part because measurement systems already in place worked differently. Their eventual adoption of the Protocol can be attributed to continued discussion, and peer pressure from industry leaders such as Holcim.74 The Protocol has also established small GHG programs in a number of developing countries, in an effort to promote the idea of GHG measurement and build the capacity to do so. To date, it has established programs in Mexico, China, Brazil, India and the Philippines. In these instances, WRI, WBCSD and other participants in the creation of the standard have been successful in inducing others to adopt the Protocol. Perhaps more importantly, the Protocol has also started a broader conversation about the need to monitor GHG emissions. Developing countries have in general been resistant to such efforts because they are not required to reduce their emissions under the Kyoto Protocol. These examples show that the Protocol was able to provide a nonthreatening way for a variety of actors to participate in technical (i.e. nonpolitical) discussions about policy action. As one interviewee put it, the Protocol provided a venue and the technical expertise for actors who wanted to get
72
Author's email communication with Bruno Vanderborght, 2 December 2009. Author's interview with Vanderborght. 74 Author's interview with Vanderborght. 73
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involved in GHG measurement.75 In short, the Protocol became a focal point for activity on corporate GHG standards where previously there had been none. Third, and finally, the Protocol is now shaping GHG measurement practices without being actively involved in them. As demonstrated in this section, most GHG programs that function at the corporate level state that they are based on the WRI/WBCSD Corporate Protocol as well as the ISO-14064 standard. In other words, the Protocol either directly, or through its “progeny” has become the de facto standard on which almost all other corporate-level GHG accounting standards are based. This is well illustrated by the evolution of the Climate Registry, which is based on four different sources, all of which are derived from the Protocol. 5. Explaining the Emergence of the Protocol The previous section illustrated that the Protocol has exerted real influence in GHG measurement practices around the world. It is now widely recognized as the “gold standard” in corporate-level emissions reporting. In this section, I turn to an explanation of why this entrepreneurial authority emerged. In the introduction, I briefly outlined a “supply and demand” model, which explains both the emergence and form (either delegated or entrepreneurial) of private authority.76 The demand side of the model explains the emergence of private authority. As discussed in greater detail in the following section, it posits that private actors are able to project authority when they provide benefits to the targets of the rules, which states, international organizations or other actors are unable or unwilling to provide. These benefits, which correspond to different types of cooperation games, include reduced transaction costs, enhanced credibility of commitments, first-mover advantage, and improved reputation.77 In coordination problems, such as battle of the sexes, private authority can reduce transaction costs, or create advantages for first movers. In collaboration problems where there is an incentive to free-ride, private authority can enhance the credibility of commitments. In suasion problems, actors have asymmetrical interests. Private actors who enjoy legitimacy therefore try to persuade others to cooperate, so they may improve their reputations. It is important to emphasize that these are not benefits that inhere in private actors; potentially, any actor in international politics could provide them. The task is to clarify the conditions under which private actors may be in a position to provide benefits that other actors cannot. 75
Author's interview with Gillenwater. For a similar conceptualization of regulation as a function of supply and demand, see Mattli and Woods 2009. 77 Martin 1992. 76
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The supply side of the model, discussed in section 4.2, explains the form that private authority takes—either delegated or entrepreneurial. I refer to the Protocol as an instance of entrepreneurial authority because the standard-setters are not delegated authority ex-ante by states. The private entrepreneurial authority that emerged in the case of corporate accounting of GHG emissions can be explained by two independent variables: the divergent preferences of key powerful states in the climate regime, and the relatively weak capacity of the regime’s focal institution, the UNFCCC Secretariat. Because developed nations had divergent views about emissions trading, there was little incentive (or potential benefit) to build state or IO capacity to implement emissions trading, including accounting methodologies. At the same time, many private firms felt that greenhouse gas regulation was inevitable, and they wanted to be prepared. Implementing a measurement scheme seemed the logical first step toward this end. A measurement scheme was viewed as a general strategy for preparing for GHG regulation. Such efforts did not necessarily imply that participating firms thought that ET would be applied to the firm level. However, some firms saw this as a wise precautionary step—a way to establish baselines, put measurement systems in place and more generally, understand their degree of exposure. In addition, there was no focal institution equipped for the task. The UNFCCC Secretariat was understaffed and had no mandate to work on corporate accounting tools—in part, no doubt, because of the aforementioned disagreement among developed nations. As a focal institution in the climate regime, it was a likely candidate to undertake this task, yet without the resources or political mandate, it was unable to do so. It is also important to note that there is a key scope condition for private authority: private expertise. Expertise is not only an important source of legitimacy, it enables private actors to provide benefits to the targets of private regulation.78 Without existing expertise, private authority is unlikely, since all four of the benefits listed above require that the supplier possess expert knowledge at the time benefits are demanded. In order to lower transaction costs, the governed can use existing knowledge from private governors. To signal credibility of commitments, actors bind themselves to a third party who can render expert opinions. To secure first-mover advantage, actors seek those with experience to promulgate a solution before competing proposals are presented. To improve reputational standing, actors avoid sanction by adopting the practices of those with expert legitimacy. Thus, pre-existing private expertise is a necessary, but not sufficient condition for private authority. If there is no preexisting private expertise, it is unlikely that private authority will emerge, unless there is political will among states to create it. As Jupille and Snidal suggest, 78
Weber 1978, 215f.
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creating a new institution as a response to a cooperation problem is costlier and riskier than other strategies, and is generally pursued only if other strategies are not available.79 In the discussion that follows, I address the demand and supply sides of entrepreneurial authority in turn. 5.1 The Demand for Private Authority There was clearly a demand for private entrepreneurial authority to create a corporate-level GHG accounting standard. The Protocol offered three key benefits to its users. First, it created the possibility for first mover advantage, in two distinct ways. First movers had an opportunity to shape the rules in ways that favored their interests. Moreover, firms that implemented GHG reporting would get a head start on managing emissions before national and intergovernmental rules were put in place. These early adopters would be better prepared for future regulation. They also could establish credible baselines to ensure that future emissions restrictions were not based on unrealistic expectations. Possibly, early adopters might even secure credits for early action.80 Second, the Protocol reduced transaction costs in two ways. It provided companies who wanted to implement GHG accounting with a ready-made way to do so, complete with software, a how-to guide, and technical support. Moreover, as use of the Protocol expanded, it reduced the risk that companies would have to switch to a new standard in the future. Third, the Protocol provided an opportunity for firms who used it to promote themselves as responsible global citizens. In other words, it was a tool for improving their reputations. These benefits constitute a necessary, though not sufficient, condition for the emergence of private entrepreneurial authority. I address each in turn. As carbon regulation became an increasingly likely outcome, many firms began to recognize that it was time to prepare for this eventuality. Key participants in the Protocol from the private sector acknowledged the potential advantages of early action through GHG reporting. One Protocol participant from Ford Motor Companies noted that the firm understood that carbon regulation was coming, and it wanted to be prepared.81 It viewed two advantages to early action on GHG measurement and reporting: the ability to reduce risk exposure preemptively, thus gaining an advantage over competing firms, and the ability to 79
Jupille and Snidal 2006. Recall that although the Kyoto Protocol was signed in 1997, it did not enter into force until 2005; thus, any action that firms took on climate change when the Protocol was released in 2001 was in anticipation of binding Kyoto rules. 81 Author's interview with Rob Frederick, former Manager of Corporate Social Responsibility, Ford Motor Companies, 8 May 2009. 80
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help shape the rules that might eventually become binding. Others who worked on the Protocol and related GHG registries acknowledged that, particularly in the US, there was frustration with the uncertainty surrounding future regulation. Adopting a credible measurement scheme was a way for firms to protect themselves and potentially, receive credit for reductions made before regulation was enacted.82 Indeed this is the stated reason for the creation of the California Climate Action registry (which is based on the Protocol). It describes itself as a response to the request of CEOs who began taking early action to combat climate change, and wanted “to protect their early actions to reduce emissions by having a credible and accurate record of their profiles and baselines.”83 In addition to the promise of benefits through first mover action, the Protocol provided a second benefit—reduced transaction costs. As governments and businesses began to recognize the need for a credible and robust measurement scheme, they also realized the costs of creating one. The Protocol recognized this demand and states as one of its main objectives “to simplify and reduce the costs of compiling a GHG inventory.”84 When the director of the US EPA Climate Leaders program began to move forward on program design, she quickly realized the time and effort needed to create a usable GHG measurement scheme. After talking with staff at WRI, she noted that “it just made sense” to use the Protocol. Not only would this address the costs of creating a new standard, it would ensure that the standard adopted by the EPA was internationally consistent.85 The Protocol could reduce transaction costs in another way: to the extent that the standard became widely adopted, it would eliminate the need for (and the costs associated with) switching to another standard in the future.86 Again, the Protocol was cognizant of this material benefit, and cited it as a reason to use the tool: “Both business and other stakeholders benefit from converging on a common standard.”87 Moreover, the Protocol not only reduced transaction costs by providing a ready-made standard, it also furnished the tools for firms to find ways to save money through improved efficiency. By measuring the energy flows of the organization, Protocol users could identify sources of waste and areas for improvement—reducing the financial transaction costs of doing business. Finally, the Protocol allowed adopters to publicize their good deeds, thereby burnishing their reputations as responsible corporate citizens. Using the Protocol was a way to join a “green club,” which offers excludable reputational
82
Author's interview with Eaton. Climate Action Registry, n.d. 84 World Resources Institute and World Business Council on Sustainable Development 2004, 3. 85 Author's interview with Cummis. 86 Mattli and Büthe 2003. 87 World Resources Institute and World Business Council on Sustainable Development 2004, 3. 83
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benefits to members who have taken progressive action.88 For firms that had suffered from bad publicity in the past, this was particularly attractive. For example, in the wake of bad publicity surrounding its operations in Nigeria and the sinking of the Brent Spar, Shell sought to incorporate social objectives into its strategy. As then-CEO Mark Moody-Stuart noted, “being seen as helping to deliver solutions that are common to society is also good for business.”89 One interviewee noted that businesses wanted to reduce their emissions for two reasons: to get credits for early action or “for PR reasons”—in other word, to be able to say that they are doing their part.90 The demand for private authority in the form of the Protocol is quite clear: participants stood to benefit materially and enhance their reputations. WRI and WBCSD recognized the opportunity to provide these benefits and stepped forward. However, explaining the emergence of entrepreneurial authority is incomplete without a discussion of why other actors did not step forward as suppliers of authority. In particular, why did states not cooperate to create a corporate accounting protocol? Alternatively, why was this type of tool not created by an international organization? To answer these questions, I now turn to the supply of private authority. 5.2 The Supply of Private Authority When should we expect to see delegated or entrepreneurial authority? The demand for private authority only explains the emergence, not the form of private authority. In this section, I argue that the supply of private authority—which can also be understood as its form—is explained by the heterogeneous preferences of key states, and the lack of a strong focal institution. Because the key negotiating blocs of developed countries disagreed about the appropriate role for emissions trading in Kyoto, and because the UNFCCC had neither the staff nor the mandate to develop corporate accounting methodologies, private entrepreneurial authority emerged in the form of the GHG Protocol. As stated earlier, greenhouse gas accounting can serve as a tool for transparency and management, but it can also serve as the basis for emissions trading. While developing accounting standards does not require plans to trade emissions, emissions trading requires such tools to measure what it to be traded. This created a feedback from the negotiations over emissions trading to plans for developing GHG accounting standards. Specifically, the states that negotiated the climate regime could not agree on the appropriate role for emissions trading under 88
Prakash and Potosi 2006. Hamilton 1998. 90 Author's interview with Vicki Arroyo, former Vice President, Policy Analysis and General Counsel, Pew Center on Climate Change, Washington DC, 12 November 2008. 89
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the Kyoto Protocol.91 The resulting uncertainty paralyzed several efforts to develop emissions accounting schemes, as I discuss in the following paragraphs. The most influential states in the Kyoto negotiations were the developed countries that faced binding targets and timetables under the new agreement. They were in deep disagreement about the role of emissions trading. In the runup to Kyoto, the two key negotiating blocs of developed countries were the EU and the JUSSCANNZ group. The latter (now called the Umbrella Group) was comprised of Japan, the US, Canada, Norway, Australia, Switzerland and New Zealand. The schism over emissions trading was evident from the beginning of the Kyoto negotiations. As early as 1990, the EU focused on regulatory action as mandated by the precautionary principle, which dictates that the absence of scientific certainty should not prevent states from taking precautionary action toward addressing environmental problems.92 It was skeptical about emissions trading, and as a key player on the global stage in climate change policy, objected to the possibility that developed countries could buy their way out of domestic reductions through trading.93 One account of the EU’s position on climate change states quite plainly, “[e]missions trading was not part of the EU negotiating position in the Kyoto negotiations.”94 Led by the US, JUSSCANNZ, by contrast, pushed hard for market mechanisms and opposed any cap on the extent to which reduction targets could be met via market mechanisms. In the wake of successful implementation of an emissions trading scheme for nitrogen and sulfur oxides in the Clean Air Act, the US was a particularly resolute advocate for emissions trading in Kyoto. It argued that emissions trading was an appropriate and feasible policy. 95 As Grubb et al note, the US “embarked upon strenuous diplomatic efforts” to promote emissions trading, which “found ready favor” with the other governments in the JUSSCANNZ group.96 This division between the EU and JUSSCANNZ persisted through the Kyoto negotiations. JUSSCANNZ wanted maximum flexibility in the ways that each state could meet its targets; in other words, it continued to push for emissions trading. More broadly, it believed in a “leave it to the market 91
Even the final text in Article 17 of the Kyoto was very vague about how emissions trading would actually be implemented. The text simply notes, “The Conference of the Parties shall define the relevant principles, modalities, in particular for verification, reporting and accountability for emissions trading.” (UNFCCC 1997). 92 The precautionary principle is a guiding principle of the Framework Convention on Climate Change (Article 3) and is referenced through the preambular text of the Kyoto Protocol. 93 Oberthur and Ott 1996, 188f; Skjaerseth and Wettestad 2008; Depledge 2006. 94 Skjærseth and Wettestad 2008, 67. 95 Schreurs 2004. 96 Grubb et al 1999, 91. Published by Berkeley Electronic Press, 2010
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approach,” and generally mistrusted the command and control approaches supported by the EU.97 The EU, with no experience in trading, felt strongly that reductions should be made domestically, without the “back door” of trading.98 In the end, the final text at Kyoto created trading mechanisms, but there was no agreement about how they would be used.99 In other words, the divergence in preferences had yet to be resolved. The political impasse on the role that emissions trading would play in the implementation of Kyoto was not resolved until 2001, when the EU shifted toward a more open attitude toward emissions trading.100 The key point is that while WRI and WBCSD were drafting the Greenhouse Gas Protocol, the two largest negotiating blocs in the developed world were feuding over whether and how emissions trading would be part of an intergovernmental agreement on climate change. Thus, the preferences of key states were clearly heterogeneous, providing an important condition for the supply of entrepreneurial private authority. The US withdrawal from the Kyoto process created another layer of divergent preferences: between the US and states that supported Kyoto. In the US, the decision not to move forward with ratification resulted in a slowing of federal activity on climate change and great uncertainty about future regulation. As noted above, many firms expected climate change regulation to be adopted eventually and were concerned that postponing action would make adjustment harder later on (and hurt their reputations internationally). Despite their concern, the US government failed to give them any guidance or help them overcome collective action problems. Uncertainty about the form that “inevitable” regulations would ultimately take, coupled with little action by the government, provided a window for private actors to fill the gap through private standards, and a compelling reason for firms to adopt those standards. As one interviewee noted, uncertainty was a key motivator for business involvement in the Protocol.101 Although the Protocol could not be a substitute for federal regulation, it served as a plausible and legitimate interim measure until government policy took shape. Moreover, private and voluntary standards were a way to circumvent government inaction. Indeed, an EPA official said that working with WRI “gave them cover” 97
Oberthur and Ott (1999, 190) note that this was in part a cultural difference: the AngloAmerican faith in markets versus the more traditional approach of “continental Europe.” 98 There are numerous accounts of the history of the Kyoto negotiations. This summary draws on Schreurs 2004; Werksman 1998; and Yamin 2005, which focus particularly on the flexibility mechanisms. 99 Kyoto Protocol, Articles 6, 12 and 17. 100 See, for example, Zapfel and Vainio 2002. The reasons for the shift in the EU’s position and the trading scheme it developed between 1998 and 2003 are beyond the scope of the inquiry here, but see Lefevere 2005. 101 Author's interview with Eaton. http://www.bepress.com/bap/vol12/iss3/art3 DOI: 10.2202/1469-3569.1318
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to advance a policy agenda that was not consistent with the Bush administration’s view.102 In this sense, the WRI-WBCSD initiative to develop the Protocol was in the right place at the right time, providing an opportunity for forward-looking firms and organizations to take some action toward preparing for future regulation. The second independent variable that accounts for the form of private authority is the existence and capacity of a focal institution. I hypothesize that when there is a weak focal institution, or none exists, entrepreneurial private authority will emerge. Since the international organization most likely to deal with corporate-level standards, the UNFCCC Secretariat, was faced with resource constraints, the GHG Protocol was able to establish itself as a focal institution. With respect to emissions trading, the focal institution, the UNFCCC Secretariat, had neither the capability nor the mandate to oversee a corporate-level GHG accounting system. The Protocol was created between 1998 and 2001. At that time, the UNFCCC Secretariat was focused on two types of GHG measurement: project-based accounting and national reporting. By the mid1990s, states were beginning to design and implement carbon-offset projects in anticipation of the Clean Development Mechanism (at that time, the pilot efforts were called “Activities Implemented Jointly”). These activities focused on project-based emissions measurement: how much CO2 would have been emitted without a given offsetting project? The Secretariat was also tasked with helping Parties measure and report national level emissions, as required under Article 12 of the Framework Convention. Quite simply, there was no political mandate for the Secretariat to develop measurement protocols for corporate-level emissions. This lack of mandate was in part attributable to the lack of consensus among states on the role of emissions trading in the future climate regime. Even if the focal institution had wanted to work on corporate-level accounting “on the side”, there were very few resources to do so. In the early stages of the Clean Development Mechanism, there were only two staff members assigned to that issue,103 and as late as 2001, the Secretariat reported a total of 58 professional level staff employed in the entire organization.104 The Greenhouse Gas Protocol, by contrast, had 22 staff serving on the project team, as well as hundreds of contributors involved in the drafting, peer review and revising of the first edition. Even with a political mandate, the Secretariat would have lacked in capacity—both in numbers and in expertise.
102
Author's not-for-attribution interview with EPA official, Washington DC, 10 November 2008. Author's interview with Christiana Figueres, member, Costa Rican delegation, 20 November 2008. 104 UNFCCC (2001), p. 20. 103
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6. Conclusion This study of the GHG Protocol illustrates a successful case of entrepreneurial authority. The Protocol serves as the basis for the ISO standard on GHG reporting, as well as countless voluntary reporting registries. It has been adopted by numerous firms and large swaths of a few industries, and is being piloted in developing countries. In a word, the GHG accounting practices created by WRI, WBCSD and the participants in the Protocol process have become the standard of choice for corporate reporting of GHG emissions worldwide. The success of the GHG Protocol is due in part due to its timing: it became the focal institution for corporate-level reporting simply because at the time, there was no organization—public or private—with the expertise to fulfill the same role. Although there had been considerable work on carbon accounting at the national and project levels, WRI and WBCSD were among the first to gather existing expertise on corporate level accounting. What little work had been done on the corporate level was fragmented across firms and governments that had developed pilot programs. The Protocol process was able to draw on these efforts, and bring the actors involved in them into one room. But timing alone does not provide a complete account of the success of why WRI and WBCSD were successful in attaining regulatory authority, nor why targets of these privately-set standards chose to adopt them. The success of these two NGOs in jointly becoming the private regulator for corporate-level GHG accounting is further explained by several factors. First, the disagreement among the EU and JUSSCANNZ bloc on the appropriate role for emissions trading in the climate regime gave rise to a vacuum of government action.105 As a result, there were few resources earmarked for the FCCC Secretariat (or other international organizations, for that matter) to pursue the development of policies to implement emissions trading, which may have included corporate-level standards; the overwhelming focus was on offsets. This provided a window of opportunity for private actors to create their own corporate standards without much opposition. Second, the transparency of the rule-making process and the willingness by WRI and WBCSD to include all interested parties endowed the process and, eventually, the rules with a high level of legitimacy. Indeed, a number of interviewees described the reputation and legitimacy of WRI, WBCSD and the Protocol process as reasons for adopting the Protocol standards. Third, the transparency also demonstrated the rigor and iterative nature of process: the rules were subject to peer-review, road-testing, and revision—all of which reinforced the notion that the rules produced were of high quality.
105
Author's interview with Arroyo.
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Since authority is a relational concept, an adequate explanation of the regulatory authority of the GHG Protocol must also account for why potential targets of this form of private regulation chose to comply. I have argued that the Protocol was able to provide both material and reputational benefits to its users. The Protocol was a way to reduce transaction costs by standardizing reporting practices and providing technical support to its users. It also helped early adopters get a head start on preparing for future regulation. Regulatory uncertainty surrounding emissions reporting and trading was clearly an important motivating factor for many firms. Early adopters could not only begin to measure and manage their emissions, they could also potentially receive credits for reductions made before regulation was implemented. At the same time, the Protocol allowed users to tout their environmental responsibility through the use of a rigorous and vetted reporting protocol. Finally, the involvement of many of the adopters in the rule-making process is also a key element in explaining why so many actors voluntary chose to comply with these private standards. Involvement in the rule-making process had two beneficial influences. It allowed participants to shape the final outcomes (presumably, somewhat in accordance with their own preferences), and thereby created buy-in for those involved—a further incentive to use the standards. In sum, the case of the GHG Protocol support Büthe’s assertion that the supply of private rules often coincides with private political and economic benefits to those who adhere them.106 Although there are many broader implications of this study, I will highlight two that merit further inquiry. First, it is clear that the Protocol began with “a coalition of the willing”—NGOs and firms interested in taking action on climate change both for altruistic and self-interested reasons. This self-selected group was critical to creating a core of “negotiators” willing to come to an agreement about rules without sacrificing their quality or content. Also important was the diversity of the group: drawn from both NGOs and industry, all were committed to producing quality standards. In other words, because of their interest in creating a meaningful set of accounting rules, the result was not regulatory capture, but rather, common interest regulation.107 Future research should explore this testable proposition is a diversity of interests among private rulemakers a necessary condition for publicly-minded regulation? Put another way, would a “coalition of the willing” comprised solely of NGOs or solely of private firms produce the same kind of regulation? Second, the technical requirements for implementing the Protocol have meant that the developers and earliest users of the rules were from the developed world. Nonetheless, there is clearly a commitment among many users to promote adoption in the developing world, where technical capacity is generally lower. 106 107
Büthe 2010. Mattli and Woods 2009, 4.
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This has resulted in capacity building efforts to enhance knowledge and implementation rates across the developing world. This kind of extension of private regulation to developing countries raises interesting normative questions. Couched in the benevolent terms of capacity building, promoting technical ability in the developing world appears normatively desirable. But it can also be viewed as a private form of regulatory globalization, where private regulators extend their reach and power internationally under the guise of training.108 References Betsill, Michele M. and Matthew J. Hoffman. 2009. “The Evolution of Emissions Trading Systems for Greenhouse Gases: Mapping the Cap and Trade Policy Domain.” Paper presented at the 50th Annual Meeting of the International Studies Association, New York, NY, 15-18 February. Braithwaite, John, and Peter Drahos. 2000. Global Business Regulation. Cambridge: Cambridge University Press. Bernstein, Steven, and Benjamin Cashore. 2007. “Can Non-State Global Governance be Legitimate? An Analytical Framework.” Regulation and Governance 1(1): 1-25. Büthe, Tim. 2010. “Private Regulation in the Global Economy: A Review of the Literature.” Business and Politics 12 (3). Capoor, Karan and Philippe Ambrosi. 2009. State and Trends of the Carbon Market 2008. Washington DC: The World Bank. Carbon Disclosure Project. 2008. “Quick Facts” At http://stage.cdproject.net/reports.asp (last accessed Augsut 24, 2010). Climate Action Registry. n.d. “About us.” At http://www.climateregistry.org/about.html (last accessed August 24, 2010). Cutler, A. Claire, Virginia Haufler, and Tony Porter, eds. 1999. Private Authority and International Affairs. Albany: SUNY Press. Dahl, Robert A. 1957. “The Concept of Power.” Behavioral Science 2: 201-216. Depledge, Joanna. 2006. “The Opposite of Learning: Ossification in the Climate Change Regime.” Global Environmental Politics 6 (1): 1-22. GHG Protocol Initiative. “GHG Protocol Update, September 2001.” At http://www.ghgprotocol.org/downloads/newsletter_archive/GHG_Protocol _Newsletter_Sept_2001.pdf (last accessed August 24, 2010). GHG Protocol Initiative. Newsletter #7, April 2003. At http://www.ghgprotocol.org/downloads/newsletter_archive/GHG_Protocol _Newsletter_No_7_2003.pdf (last accessed August 24, 2010).
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On regulatory globalization, see Braithwaite and Drahos 2000.
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GHG Protocol Initiative. n.d. “Funders.” At http://www.ghgprotocol.org/aboutghgp/funders (last accessed August 24, 2010). Green, Jessica F. 2010. “A Theory of Private Authority.” Unpublished manuscript. Hall, Rodney Bruce, and Thomas J. Biersteker, eds. 2002. The Emergence of Private Authority in Global Governance. New York: Cambridge University Press. Hamilton, Martha. 1998. “Shell’s New Worldview; At Helm of Oil Titan, Moody-Stuart Sees Profit in Principles” Washington Post 2 August 1998. Section H, p. 1. Haufler, Virginia. 2001. A Public Role for the Private Sector. Washington, DC: Carnegie Endowment for International Peace. Intergovernmental Panel on Climate Change. 1996. Revised Guidelines for National Greenhouse Gas Inventories. IGES: Japan. Jupille, Joseph and Duncan Snidal. 2006. “The Choice of International Institutions: Cooperation, Alternatives and Strategies.” Unpublished manuscript, available at: http://ssrn.com/abstract=1008945. Lefevere, Jurgen. 2005. “The EU Greenhouse Gas Emissions Allowance Trading Scheme.” In Climate Change and Carbon Markets: A Handbook of Emissions Reduction Mechanisms, edited by F. Yamin. London: Earthscan. Martin, Lisa L. 1992. “Interests, Power and Multilateralism.” International Organization 46 (4): 765-792. Mattli, Walter, and Ngaire Woods. 2009. “In Whose Benefit? Explaining Regulatory Change in Global Politics.” In The Politics of Global Regulation, edited by W. Mattli and N. Woods. Princeton, NJ: Princeton University Press. Mattli, Walter, and Tim Büthe. 2003. “Setting International Standards: Technological Rationality or Primacy of Power?” World Politics 56 (1):142. Mattli, Walter, and Tim Büthe. 2005. “Global Private Governance: Lessons from a National Model of Setting Standards in Accounting.” Law and Contemporary Problems 68 (3/4): 225-262. Prakash, Aseem, and Matthew Potoski. 2006. The Voluntary Environmentalists: Green Clubs, ISO 14001, and Voluntary Environmental Regulations. Cambridge: Cambridge University Press. Riddell, Zoe and Brittany Chamberlin. 2007. Investor Research Project. New York: Carbon Disclosure Project.
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Schreurs, Miranda. 2004. “The Climate Change Divide: The European Union, the United States and the Future of the Kyoto Protocol. In Green Giants? Environmental Policies of the United States and the European Union, edited by N. J. Vig and M. G. Faure. Cambridge, MA: MIT Press. Skjærseth, Jon Birger, and Jørgen Wettestad. 2008. EU Emissions Trading. Aldershot: Ashgate. Sundin, Heidi, and Janet Ranganathan. 2002. “Managing Business Greenhouse Gas Emissions: The Greenhouse Gas Protocol -- A Strategic and Operational Tool.” Corporate Environmental Strategy 9 (2):137-144. The Climate Protection Initiative. 1998. Safe Climate, Sound Business: An Action Agenda. World Resources Institute, Washington DC. UNFCCC. 1995. Report of the Conference of the Parties on its First Session, Held at Berlin from 28 March to 7 April 1995. FCCC/CP/1995/7/Add.1. 6 June. Decision 5/CP.1. UNFCCC. 2001. Administrative and Financial Matters. FCCC/SBI/2001/16. 19 October. UNFCCC. 2002. Report of the Conference of the Parties on its Seventh Session. FCCC/CP/2001/13/Add.1-Add.4. UNFCCC. 2006. Updated UNFCCC Reporting Guidelines on Annual Inventories Following Incorporation of the Provisions of Decision 14/CP.11. FCCC/SBSTA/2006/9. 18 August 2006. United States Environmental Protection Agency. 2009. Final Mandatory GHG Reporting Rule. Accessed at http://www.epa.gov/climatechange/emissions/ghgrulemaking.html. 23 October 2009. Victor, David, and Joshua House. 2006. “BP’s emissions trading system.” Energy Policy 34: 2100–2112. Vine, Edward and Jayant Sathaye. 1997. The Monitoring, Evaluation, Reporting and Verification of Climate Change Mitigation Projects: Discussion of Issues and Methodologies and Review of Existing Protocols and Guidelines. Lawrence Berkeley National Laboratory, Berkeley, CA. Vogel, David. 2008. “Private Global Business Regulation.” Annual Review of Political Science 11: 261-282. Weber, Max. 1978. Economy and Society: An Outline of Interpretive Sociology. Translation of Wirtschaft und Gesellschaft, based on the 4th German ed. Edited by Guenther Roth and Claus Wittich. Berkeley: University of California Press. Werksman, Jacob. 1998. “The Clean Development Mechanism: Unwrapping the Kyoto Surprise.” Review of European Community and International Environmental Law 7 (2): 147-158.
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World Resources Institute and the World Business Council on Sustainable Development. 2001. The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard. First edition. Washington DC: World Resources Institute. World Resources Institute and the World Business Council on Sustainable Development. 2004. The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard. Revised edition. Washington DC: World Resources Institute, Washington DC. Yamin, Farhana, ed. 2005. Climate Change and Carbon Markets: A Handbook of Emission Reduction Mechanisms. London: Earthscan. Zapfel, Peter, and Matti Vainio. 2002. Pathways to European Greenhouse Gas Emissions Trading: History and Misconceptions. Milan: Fonazione Eni Enrico Mattei.
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Article 4
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Engineering Uncontestedness? The Origins and Institutional Development of the International Electrotechnical Commission (IEC) Tim Büthe, Duke University
Recommended Citation: Büthe, Tim (2010) "Engineering Uncontestedness? The Origins and Institutional Development of the International Electrotechnical Commission (IEC)," Business and Politics: Vol. 12 : Iss. 3, Article 4. Available at: http://www.bepress.com/bap/vol12/iss3/art4 DOI: 10.2202/1469-3569.1338 ©2010 Berkeley Electronic Press. All rights reserved.
Engineering Uncontestedness? The Origins and Institutional Development of the International Electrotechnical Commission (IEC) Tim Büthe
Abstract Private regulation often entails competition among multiple rule-makers, but private rules and regulators do not always compete. For substantial parts of the global economy, a single private body (per issue) is recognized as the focal point for global rule-making. The selection of the institutional setting here effectively takes place prior to drawing up the specific rules, with important consequences for the politics of regulating global markets. In this paper, I develop a theoretical explanation for how a private transnational organization may attain such preeminence—how it can become the focal point for rule-making—in its area of expertise. I emphasize the transnational body's capacity to pursue its organizational self-interest, as well as timing and sequence. I then examine empirically a particularly important body of this kind, which today is essentially uncontested as the focal point for private regulation in its area, even though its standards often have substantial distributive implications: the International Electrotechnical Commission (IEC). I analyze the persistence and changes in the IEC's formal rules or procedures and informal norms, as well as the broadening scope of its regulatory authority and membership over more than a century. KEYWORDS: regulation, private governance, technology, institutional development Author Notes: Tim Büthe is Assistant Professor of Political Science and a Faculty Associate of the Center for International Studies at Duke University (http://www.buthe.info); he can be reached via email at
[email protected]. He thanks Danielle Lupton for assistance with figure 7, as well as Deborah Avant, Ben Cashore, Martha Finnemore, Jessica Green, Susan Sell, and three exceptionally thoughtful anonymous reviewers for Business and Politics for helpful comments on previous drafts.
Büthe: Engineering Uncontestedness
1. Sequence and Agency in Global Private Regulation Private regulation in the global economy often entails competition among multiple rule-makers. Numerous transnational civil society groups, for instance, seek to influence the environmental impact, employee benefits, charitable giving, and other aspects of companies' behavior through “corporate social responsibility” standards and the reputational benefits that a firm gains or the costs it incurs as a consequence of being known (not) to comply with one or another of these often competing standards.1 Similarly, various “fair trade” labels seek to signal to the consumer, who wants to benefit poor farmers or workers, that the products so labeled warrant paying more.2 Where multiple private regulators compete, each of them develops a set of rules and then uses a variety of commercial and political strategies to foster their use.3 In these circumstances, one set of rules becomes the global standard—if so—through market or political competition that takes place after the private rule-making. Competition among multiple rules and regulators, however, is not an inherent characteristic of private regulation. Substantial parts of the global economy are effectively governed by rules that have been developed by private bodies of which each one is essentially uncontested as the focal point for global rule-making in its respective area of expertise.4 The selection of the international institutional setting for rule-making here effectively takes place prior to drawing up the specific rules. Since these organizations tend to use some form of consensus procedures, scholars of global governance often refer to the rules developed through such institutionalized processes as “voluntary consensus standards”—though the precise meaning of “consensus” may range from unanimity to a majority of the participating experts, and “voluntary” refers “only
1
E.g., Auld, Bernstein and Cashore 2008; Baron 2001; Kirton and Trebilcock 2004; Ruggie 2004; and Vogel 2005 and 2008. 2 Jaffee 2007; Levi and Linton 2003; Raynolds and Long 2007; Starobin and Weinthal 2010. See also Ehrlich 2010. 3 Producers or service providers may, for instance, adopt one standard over another based on the relative cost of implementation (compliance), the technical quality of the standards, or the reputational benefit of being associated with a more highly respected professional body through implementation of its standards. Alternatively competing rule-makers may seek to convince individual consumers, firms' purchasing managers (especially for business-to-business transactions), or government regulators to demand compliance with their standard as a condition for a sale or for paying a particular price. In and between market economies, pure market competition (over price or quality) is likely to be an important component of any such battle for predominance (see Besen and Farrell 1994; Mattli 2003), but the history of "standards wars" is full of examples where more overtly political strategies proved decisive (see, e.g., McNichol 2006; Shapiro and Varian 1999; Surowiecki 2002). 4 See, e.g., Büthe and Mattli 2011; Green 2010.
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to the manner in which the document was developed,”5 i.e., participation in the standard-setting process is voluntary. Compliance with these “voluntary” international standards may in fact be rendered mandatory by market participants, such as customers who demand it as part of their product specifications or insurers who demand it to minimize their risk exposure. In 1991, for example, the American multinational electronics components manufacturer, AMP Inc., lost out to AT&T Technologies in the U.S. Telecommunication Industry Association: ANSI/TIA/EIA-568, the new U.S. domestic standard for connectors between fiber optic cables—a crucial component of the exponentially growing data communications networks— established a type of connector that was patented (and licensed) by AT&T, rather than AMP's SC-type connector, as the primary standard for the U.S. Due to this TIA decision, expectations of network effects started to work in favor of AT&T's technology. AMP was therefore unlikely to succeed through market competition in the U.S.,6 but it did not give up. It first worked through the representatives of its European subsidiaries in the technical committees of their respective national standards bodies to establish SC-type connectors as the new European standard. In 1995, shortly after succeeding in the European regional electrotechnical standard-setting organization, CENELEC, AMP then succeeded in establishing its technology as the international standard in the International Electrotechnical Commission (IEC).7 Thanks to the broad-based prior recognition of IEC as the international forum for developing electro-technical consensus standards, the expectation of strong network effects now began to work in AMP's favor: Sales of SC-connectors, made or licensed by AMP, soon exceeded sales of ST-connectors, eventually even in the U.S. AMP attributes $50-100 million of its profits from 1995 to 2004 to this strategic success in international standardization.8 5
ANSI 2010, 3. For this reason, I use standards, rules, and regulations interchangeably in this article, following Büthe 2010c. 6 Standards for connectors are inherently interface, inter-operability, or compatibility standards, where network effects make market entry for divergent standards difficult (see Adams and Brock 1982; David and Greenstein 1990; Shapiro 2001), and AMP's technologically more sophisticated and consequently more expensive connector was unlikely to out-compete the AT&T's STconnector on price (de Vries 2006, 133). 7 CENELEC and IEC have a cooperation agreement that ensures regional input into the international process (and vice versa), rather than competition. The European and international standards (today EN 61754-4 and IEC 61754-4) were initially not fully identical, but the differences did not affect AMP's intellectual property rights benefits; see Schaap and de Vries 2005, 75. 8 De Vries 2006, 132f. AMP may have been further helped by the injunction under the WTO TBTAgreement (new in 1995) against governments requiring technological solutions that diverge from technically adequate international standards; see below. AT&T Technologies in 1996 became Lucent Technologies and in 2006 Alcatel-Lucent. AMP in 1999 merged with Tyco International and in 2007 became a core unit of independent Tyco Electronics.
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Compliance with private standards, developed through “consensus” procedures in focal institutions such as the IEC, may also be de jure mandatory due to the use of the standards by governments for consumer or investor protection, in health or safety regulations, or in other measures that effectively control market access. Many of the standards for electromechanical and electronic components of railways, for instance, developed by IEC's Technical Committee 9, are copied into, or referenced in, local or national laws and regulations for urban transport and national railway systems in Canada, throughout Europe, and in East Asia, including China and the other members of the nascent Trans-Asian Railway Network.9 The resulting harmonization of technical rules has increased international competition and yielded efficiency gains, but also has put previously protected, uncompetitive producers out of business. How did the IEC become this focal point for rule-making for global markets? How did it become, for many electrical and electronic goods, essentially uncontested as the institutional setting for such regulatory activities, even when its standards have distributional implications? Answering this question is important, because the politics of regulating global markets differ when a single private regulator is selected as the global rule-maker for a given issue prior to making (most of) its rules. For those who then lose during the rule-making, it may be prohibitively expensive or even futile to subsequently set up an alternative institution to develop a competing standard, all the while the “consensus” standard is already becoming entrenched. Conflicts of interest, which otherwise may be carried out later through market competition or other means, here shift to the rule-making stage. As a consequence, when the rule-maker is selected prior to the rule-making, contestation takes place within the specific institutional setting of a principally uncontested transnational standard-setting organization. The existing literature, however, offers few analyses of the origins and institutional development of such organizations that are the ex ante focal point for setting standards for global markets and no such analyses of the IEC. This paper seeks to fill a gap in the literature on private regulation through an analysis of what, following Paul Pierson, I call the “institutional development” of the IEC over more than a century.10 In section 2, I discuss the main reasons for studying the IEC, based on an overview of the role the IEC plays in the governance of the global economy. Before delving into the empirics, I explore deductively in section 3 how a transnational body might come to be seen as the unambiguous focal point for international standard-setting with an ever broader scope of regulatory authority. I argue that preeminence as the global standardsetter (for a given issue area) must be actively pursued and hence requires the rule-making body to have agency, i.e. some real capacity to pursue its 9
ISO/IEC 2007, 17. Pierson 2004, esp. 14f.
10
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organizational self-interest. I recognize that specific actions in pursuit of regulatory preeminence are highly contingent upon the idiosyncratic triggers in particular cases and therefore may not be suitable for theorizing, but I identify two other contextual factors that should have a systematic influence on the likelihood of observing a predominant rule-maker in the first place. Such predominance or "focalness" is a function, I argue, of when a private regulatory body is created relative to potential competitors and whether its quest for preeminence precedes, coincides, or follows changes in the stakes that others have in how it exercises its authority. In section 4, I then examine the institutional development of the IEC empirically, including the persistence and change in its rules, procedures, and norms, the broadening scope of its regulatory authority, and the sequence of these changes relative to the changes in the political and economic stakes in IEC rulemaking. Standardized voltage, frequencies, types of apparatus, standard ratings and dimensions make it possible for the manufacturer to produce in quantity at minimum cost, devices of maximum efficiency and quality. C. E. Skinner (1928), 155 The process of standardization is always a political struggle, with winners and losers. James Surowiecki (2002), 89
2. The Importance of the IEC and Its Standards for the Study of Business and Politics The International Electrotechnical Commission was founded in 1906 to establish common international terms and measurements for “ratings of electrical apparatus and machinery.”11 In the century since then, it has become the preeminent international standard-setter for electrical, electronic, and related technologies, including magnetics, electro-acoustics, multimedia, telecommunication, and all forms of energy production and distribution.12 IEC standards specify battery sizes, capacity ratings for transformers and electrical cables, safety features such as double insulation on household electrical appliances, and maximum allowable thresholds of electromagnetic disturbances to ensure non-interference when electronic or electrical products are operated in close proximity to each other— 11 12
1904 Declaration calling for the establishment of the IEC. See IEC Mission Statement.
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which is crucial for pacemakers, electronic components of brakes for cars, trucks, and trains, and computers running applications that are essential for public safety, such as air traffic control software. Many of these IEC standards are widely used: In advanced industrialized countries and increasingly also in developing countries, for instance, consumers no longer worry whether using the vacuum cleaner is going to interfere with the neighbor's TV reception, because reputable manufacturers (of both vacuum cleaners and TVs) near-universally implement IEC 61,000-series standards for electromagnetic compatibility.13 Understanding the IEC is important for those who want to understand global governance. The IEC and the International Organization for Standardization (ISO) are widely recognized as the technical rule-makers for the global economy (in their respective areas of expertise); jointly they account for about 85% of international product standards.14 Because ISO standards cover a broader range of industries and include the prominent 9,000-series quality management standards and the 14,000-series standards for assessing and managing the environmental impact of business activities, ISO has attracted the bulk of the attention in the social-scientific literature on product standardsetting.15 The few analyses that take explicit note of the IEC usually treat it only cursorily or subsume IEC standard-setting in joint analyses of ISO and IEC standard-setting.16 The latter strategy is justified insofar as the two transnational organizations have a very similar structure, common rules of procedure, and even a common official “vocabulary” for standardization.17 When it comes to understanding institutional origins and development, however, subsuming the IEC under the ISO turns history on its head: Founded in 1906, the IEC was established half a century before the ISO and provided the organizational blueprint when the ISO was established.18 Even those who want to understand the ISO as an
13
For a technical overview, see Ianoz, Kunz and Moehr 2002. Product standards are explicit norms in technical language, which specify design or performance characteristics of manufactured goods, such as their sizes, shapes, functions, or the way in which they are "labeled or packaged before [being] put on sale" (WTO 1998), including testing procedures to assess conformity with the specified characteristics. 15 E.g., Brunsson and Jacobsson 2000b; Casper and Hancké 1999; Guler, Guillén, and MacPherson, 2002; Kollman and Prakasch 2001; Murphy and Yates 2008; Prakash and Potoski 2010; and Tamm Hallström 2004. Ironically, the 9,000 and 14,000-series standards are a-typical. Unlike the vast majority of ISO standards, they are not product standards, and the substantive focus of the 14,000-series standards is one of the few areas where competing standard[-setter]s contest the predominance of ISO (see, e.g., Cashore 2002; McDermott, Noah, and Cashore 2008). 16 Adolphi and Kleinemeyer 1998; Büthe and Mattli 2010 and 2011; Büthe and Witte 2004; Loya and Boli 1999; Mattli and Büthe 2003; Sykes 1995. 17 See ISO/IEC (2009) and ISO/IEC (1996). 18 Ainsworth 1964, 365; Murphy and Yates 2008, 12f; Yates and Murphy 2006 and 2008. ISO had two predecessor organizations going back to 1926 and to the Allied war efforts, respectively. 14
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international institution should therefore start with the IEC, which remains little known. Even though IEC standards are legally merely explicit norms in technical language, and the IEC itself does not require anyone to comply with its standards, these technical rules clearly have power in a Dahlian sense.19 They prompt manufacturers to design their products or operate their production processes differently than they otherwise would, or get consumers to blindly trust equipment and labels—for instance for “safe” and “effective” radiation dosages emitted by x-ray machines—of which they would otherwise have strong reasons to be suspicious. IEC standards have such power, because third parties create economic and political-legal incentives to implement them. Through the actions of private economic actors, for instance, IEC standards control market access, as consumers or businesses rely upon them for interoperability, and purchasing managers from industry and retailers incorporate them into purchase orders. Producers may also comply with them because insurance companies use them to gauge the risks that a manufacturer poses,20 or because courts look to them as an indication of best practice in product liability law suits.21 In addition, governments not only use IEC standards for public procurement but also and increasingly incorporate or reference them in health and safety regulations, which render the “voluntary” IEC standards literally mandatory.22 How the IEC became the largely uncontested institutional setting for writing global rules for electrical and electronic technology and products23 also matters for students of economics and political economy, especially international trade, for at least two reasons. First, standardization brings macroeconomic benefits, which are well established, but also has distributional consequences, which depend in part on the particular process of rule-making and thus call for a better understanding of the origins (and consequences) of standard-setting with ex ante institutional selection. A recent study of UK data from 1948 to 2002, for instance, attributes 13% of labor productivity growth and 10% of the UK's average annual GDP growth of 2.5% to technical standards—of which a rapidly 19
Dahl 1957. See, e.g., Brearly 1923; Klein 1997. 21 See, e.g., Cafaggi 2009, esp. 22-24. 22 Laws or regulations may incorporate or reference IEC standards directly (see BSI 2006; ISO/IEC 2007) or reference the "transposed" domestic standards, i.e., translated versions adopted by the country's domestic IEC member organization as a "national standard" (see Cafaggi and Janczuk 2010). See also the discussion of the interaction of "soft law," including standards, and "hard law" by Shaffer and Pollack 2010. 23 An important exception is information and communications technology: A number of specific ICT standards developed by the IEC are in competition from proprietary standards developed by firms, individually or in small groups (standards consortia), but such ex post contestation is the exception for IEC product standards and beyond the scope of this analysis. See Funk 2002. 20
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increasing share in recent years were international standards.24 A similar study for Germany attributes more than 25% of its GDP growth from 1960 to 1990 (growth of 3.3% per year on average) to standardization.25 Domestically, the vast majority of these standards are in most countries set by private bodies which are, like the IEC for electro-technical standards at the international level, essentially uncontested as the domestic rule-makers in their respective realms. Yet, both domestic and international standards often have distributional consequences, and much depends upon the specific provisions of each standard.26 Along the way to eliminating the classic problem of electromagnetic interference, for instance, manufacturers who could not meet the standards at low cost were put out of business (and consumers who might have preferred a more interference-prone but cheaper TV lost the option). As Henk de Vries has shown, even a minor change of a test for defects in insulating materials of electronic components (part of IEC standard no. 60694) saved a small European electronics manufacturer €50,000 per year; for the multinational AMP, the favorable change in IEC and CENELEC standards recounted above generated $50-100 million in additional profits through increased market share, profit margins, and licensing income.27 Given these macro- and micro-economic consequences of IEC standardization, economists and scholars of business administration, who have so far mostly focused on market-based convergence on a dominant standard such as in the battle between the Blu-ray and HD-DVD optical disk formats, should also want to better understand the origins and operation of this mode of rule-making for global markets. Second, product standards often differ across countries, making them prominent non-tariff barriers to trade (NTBs). Removal of these barriers through international harmonization promises substantial benefits, and the potential for gains appears to be particularly large for electro-technical standards. Johannes Moenius' analyses of the effect of different systems of household and industrial current (voltage and frequency), for instance, suggests that global harmonization of voltage alone would boost worldwide trade by 3.7%.28 In his micro-level analysis of hundreds of German firms in 11 sectors, Knut Blind finds that the shift from national to international standards between 1980 and 1995 produced particularly large and highly statistically significant export gains for the firms that 24
Temple, Witt and Spencer 2005. Jungmittag, Blind, and Grupp 1999. Numerous historical studies attest to similar benefits for U.S. economic growth and innovation; see, e.g., Krislov 1997, esp. 83ff; Price 1972; Robb 1956; Russell 2005 and 2007; Skinner 1928; Woerter 1972. 26 The extent to which standards provide general or merely private benefits, for instance, or the extent to which they spur or stifle innovation is a function of their specific terms; see, e.g., Farrell and Saloner 1986; Gabel 1991; Mustonen 2000; Simcoe and Rysman 2006; and Swann 2005. 27 de Vries 2006, 135, 132f. 28 Moenius 2006, 58. 25
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undertook the shift in electrical engineering and in radio, TV, and telecommunications (another major area of IEC standardization).29 Yet, harmonization of previously differing practices creates winners and losers, and even international standards can be written strategically. An IEC standard for testing the resistance of electronic equipment to shock and vibration, for instance, developed in the early 1950s under British leadership, required the use of an expensive (and according to later U.S. studies highly unreliable) “shock test machine,” which just so happened to be made exclusively by a single UK manufacturer.30 At that time, however, relatively few firms were affected by IEC standards. Since then, major changes in the global economy have greatly increased the economic salience of IEC standard-setting. Transport costs declined precipitously from the 1970s through the early 2000s, not least due to the development of an international standard for shipping containers.31 Declining transport costs intensified the international integration of product markets, for many countries as much or more than the reduction in tariffs negotiated under the GATT.32 To gain the benefits, producers as well as industrial, retail, and governmental consumers increasingly sought general technical standards to achieve the economies of scale that had been impeded by specifications that were particular to each purchase order or each supplier.33 As the share of internationally traded goods in production and consumption increased for many countries, government regulations of industrial and consumer goods also greatly increased, which often reflected voter demand for greater health, safety, and environmental protection.34 As a consequence, the share of U.S. exports, for instance, affected by product standards that differ from U.S. standards, rose from 10% in 1970 to 65% by the early 1990s. Internationally, at least one third of global trade—valued at $15.8 trillion for 2008—is affected by standards.35 Adding between 2% and 10% to the total production costs of such goods in trade between advanced industrialized countries (while their average tariff rates are now between 3% and 4% for manufactured goods), cross-national differences in product standards were, by the end of the 1990s, estimated to result in a loss of
29
Blind 2004, 292-297. U.S. National Committee of the IEC 1964, 266. For a more recent example, consider the use of TV and HDTV standards to protect national or regional markets, as shown by Austin and Milner 2001. See also Crane 1979 and Gandal 2001, esp. 145ff. 31 Egyedi 2000. 32 See Hummels 1999 and 2007 as well as Gowa and Kim 2005; Rose 2004; Tomz, Goldstein, and Rivers 2007. 33 E.g., Bergholz 2006. 34 Vogel 2011. 35 Kawamoto et al 1997, 280; WTO 2005. The valuation of world trade is from WTO 2009, 4. 30
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$20-40 billion per year in U.S. exports alone; a 2008 Congressional Research Service study even estimates losses equal to 1% - 3% of GDP annually.36 These costs of divergence intensified the push for the use of international standards, which became obligatory for government agencies in all WTO member states with the entry into force of the World Trade Organization's Agreement on Technical Barriers to Trade (TBT-Agreement).37 For electro-technology, virtually every WTO member state other than the United States has interpreted this obligation to use “international standards” (as the “technical basis” for regulatory measures) to mean an obligation to use IEC standards for electro-technical products. This regulatory convergence has benefitted competitive producers and generally consumers, thus promising overall gains in efficiency and economic welfare.38 But it has also greatly raised the stakes in IEC standard-setting, especially since it has increased the trend in many developing countries— including those with large, fast-growing markets, such as Brazil, India, and China—to adopt IEC standards essentially unchanged as national standards for electro-technology, fostering their use by producers and consumers in private transactions.39 Those who ignore IEC standards now often do so at the cost of losing access to these markets; conversely, those who implement IEC standards early or participate in setting those standards often achieve substantial cost savings, improvements in their competitive position, and increases in market share.40 3. Engineering Uncontestedness? Toward a Theory of Preeminence in Global Private Governance How might we explain the institutional development of a transnational organization over the course of a century, during which it became essentially uncontested as a private regulator and gained increasingly broad authority—as observed in the case of the IEC? The increasingly rich literature on institutional 36
Kawamoto et al 1997; Mallett 1998-99; Ahearn 2008. See also Bradford 2003; Büthe and Witte 2004; and Hanson (2005). 37 The TBT-Agreement is an integral part of the WTO. It thus takes effect with the beginning of each country's WTO membership. The obligation to use international standards is conditional on the existence of suitable international standards. 38 E.g., Blind et al 2000, 26f; Hull 2002; WTO 2005, esp. 57ff. See also Töpfer et al 2000, 13f, who estimate substantial commercial benefits for firms in micro analyses. 39 Gerlach 2007; Kennedy, Suttmeier, and Su 2008. China, unlike most countries, has combined increasing use of ISO/IEC international standards with vigorous development of differing domestic standards, which often appear to be intended to protect Chinese manufacturers from foreign competitors. 40 de Vries 2006; Schaap and de Vries 2005.
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change offers very useful insights, but not a direct answer to this question, in part because it tends to treat institutions—even formal institutions—as largely passive. I argue, by contrast: When non-governmental rule-making institutions compete, the chances of one organization to achieve and retain (issue-specific) preeminence as a private regulator in the global economy depends crucially on whether its leaders pursue preeminence actively and strategically.41 I recognize the specific actions through which individual leaders of a transnational body may pursue preeminence in pursuit of the organization's selfinterest depend upon largely idiosyncratic factors and are contingent upon the leaders' vision and capability. The specific actions and exact timing of such actions may therefore be beyond any general theory. I submit, however, that we can theorize the context to identify conditions that are conducive to a transnational organization achieving preeminent status with increasingly broad authority as a private regulator.42 This section therefore has the objective of deriving some hypotheses about three factors that affect the likelihood that a sole/primary private regulator becomes the focal point for global rule-making. In doing so, I draw on theoretical insights from the more general literatures on international institutions, institutional change, and global governance. 3.1. Capacity of the Private Regulator to Pursue its Organizational Self-Interest The work of rational choice institutionalists who tend to think of the exercise of regulatory authority as a function of the delegation of authority from a principal to an “agent,”43 as well as the work of organization theorists in the sociological institutionalist tradition,44 reminds us that international organizations are not just structures through which governments and/or private parties engage in global governance. Rather, such bodies can be actors in their own right, pursuing interests that are not simply derivatives of their members' interests.45 By implication, then, transnational private bodies also may be capable of agency. International organizations—including transnational private regulators— differ, however, in the extent to which they have the capacity to pursue their organizational self-interests. Whether an inter- or transnational body has a staff of 41
I presume that the exercise of this regulatory authority has real distributional consequences, which creates incentives for the losers to seek to overturn the preeminence of the focal institution; preeminence for decisionmaking with no stakes may occur but is analytically not particularly interesting. 42 This strategy builds on Falleti and Lynch's discussion of cause and context (2009), but seeks to theorize general elements of the context within which specific and even idiosyncratic causes operate, rather than vice versa. 43 E.g., Büthe, 2008; 2010a; Hawkins et al 2006a; Pollack 2003. 44 E.g., Fligstein 2009; Scott 2008. 45 See also Johnson 2010.
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its own, the extent to which it has agenda-setting power, and the extent to which the funding of the organization is independent of its members, all affect this capacity. Variation in an organization's ability to pursue its own interests matters if we extend to private regulators an assumption that is common and empirically well-supported in the literature on public regulators and international governmental organizations,46 namely that they have, at least inter alia, an organizational interest in exercising real and broad influence. Given this assumption, I would expect transnational bodies with greater capacity to pursue their organizational self-interest to be more likely to remain preeminent or emerge dominant and become the focal point for transnational regulatory activity in their respective areas of expertise. Why? First, such private regulators are able (and should be expected) to foster perceptions of legitimacy among a broad range of stakeholders.47 One way to do so is by emphasizing their pertinent technical expertise, which generally is afforded a certain level of deference on complex issues, even in public policy.48 Extending Jürgen Habermas' theory of communicative action to global governance, Thomas Risse has for instance suggested that global actors can create legitimacy by creating an institutional setting that permits arguments (rather than just bargains) about conflicts of interest in ways that at least allow for persuasion (as technicalscientific reasoning at least hypothetically does) and appear a-political by disallowing the use of exogenous power resources (such as a state's military or economic power).49 Second, private bodies with greater capacity to pursue their self-interest are also better able to take the necessary steps—through changes in their internal organization, decisionmaking procedures, etc.—to remain relevant to stakeholders who are powerful transnationally (as well as domestically within the affected countries). Such organizations should also be expected to be sufficiently responsive to those stakeholders to keep the incentives for the creation of a
46
See, e.g., Büthe 2007; Carpenter 2001; Fligstein 2009; Michels 1989 (1915). This may lead to a preference for real influence over visibility (see Mathiason 2007). 47 Bernstein and Cashore (2007) discuss NGO strategies for fostering perceived legitimacy specifically for NSMD regulation; my discussion in this paragraph builds on their work and extends it to private regulation more generally. 48 E.g., E. Haas 1990; P. Haas 1991; Markovits and Deutsch 1980; Schofer 1999; see also Finnemore 1992. 49 Risse 2005. Werle and Iversen (2006, 24f) also consider the communicative process of technical standardization as in itself legitimating, but turn against the idea because too many stakeholders are excluded from such highly specialized communications; see also Bernstein and Cashore 2007, 362f; Büthe 2010c; Habermas 1990; Mattli and Büthe 2005. Note that these arguments do not presume that persuasion rather than (institutionally constrained) power will be the primary mode of decisionmaking, nor that the private standard-setting will in fact be an a-political process.
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competing rule-maker low.50 In sum, they should be better able (than organizations with little capacity for agency) to prevent or fend off challenges to their predominant status as a global rule-maker, including both material interestdriven challenges and challenges to their legitimacy, e.g. from excluded stakeholders. Specifically, we should see such private regulators initiate, for instance, institutional changes that integrate these stakeholders, at least nominally,51 or see them counterbalance such challengers by giving other stakeholders a greater stake in the continued centrality of the regulator. Third, private regulators with agency are capable of actively supporting attempts to broaden the organization's regulatory scope by stakeholders “demanding” global governance in related issue areas. Based on the above assumption, we should expect them to do so—at least up to the point where such broadening risks the cohesiveness and perceived legitimacy of the organization.52 3.2. Sequence of Institutional Development and Changes in the Stakes As historical institutionalists have long emphasized, sequence matters for institutional development.53 It affects the likelihood that one private rule-maker will become preeminent in at least two ways. First, if conflicts of interest are prominent at the time of creation of an inter- or transnational organization, its founders have strong incentives to “design” an institutional mechanism to constrain the autonomy or discretion of the organization and ensure that their interests will be protected.54 Those who establish a transnational institution may do so, for instance, by requiring unanimity for any changes in the scope of the organization's regulatory authority or even for setting any particular standard. As Mahoney and Thelen point out, such constraints inhibit institutional change, especially the more gradual, less visible changes categorized as “drift” or “conversion.”55 By contrast, if the stakes in transnational rule-making are relatively low when the rule-maker is established, there are few reasons to spend much time on establishing tight controls on the regulatory body at its creation. 50
See also Auld 2009. This second point may seem at odds with the first, but being quietly responsive to powerful stakeholders (who might otherwise make an issue of it) can of course be a very effective way to appear non-political. 51 See, e.g., Bernstein and Cashore 2007, 361. 52 Due to the "pathologies" of an organization's pursuit of managerialist interests, emphasized by Barnett and Finnemore 2004, we might even see broadening to the point where it is ultimately harmful to the organization, but an organization whose leaders take a long-term perspective on behalf of the organization may well steer clear of such dangers. 53 Büthe 2002; Pierson 2000; Thelen and Steinmo 1992; Thelen 1999. See also Farrell and Newman 2010; Fioretos 2011. 54 Koremenos, Lipson and Snidal 2001. 55 Mahoney and Thelen 2010, esp. 18ff.
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Second, if the stakes in transnational rule-making (in a given issue area) are high from the start—as they have been, for example, in the attempts to change the practices of forestry through environmental sustainability standards or to change shop floor conditions and labor relations through international labor standards—the incentives to set up competing rule-makers are high:56 When civil society activists establish a global rule-maker, the targets of the rules may establish an alternative rule-maker in an attempt to blunt the demands of activists and lower their costs of “compliance.”57 Low-cost producers may do so to escape high-cost producers' attempts to impose their high costs on everyone else (even if such attempts are described as “leveling the playing field”);58 and even highminded, altruistic NGOs may differ in their priorities and therefore end up competing with each other.59 By contrast, if the stakes are initially low, the incentives to set up competing private regulators should also be low. As a consequence, a private regulator established during low-stakes times is more likely to be the only (and hence by default the focal) regulator in its area of expertise, which creates opportunities to establish itself as a “legitimate” rulemaker, as discussed below. This is crucially important if compliance or use of the rules is genuinely optional, in which case the regulator needs to be perceived as legitimate to elicit compliance even from those for whom the rules have detrimental distributional consequences, i.e., it needs to be perceived as legitimate to be effective as a global rule-maker. An opportunity to establish legitimacy is even important when socio-economic incentives compel market participants to comply with the rules,60 as it allows the private regulator to move beyond the point where “firms and social actors constantly evaluate and reevaluate whether to withdraw support based on short-term cost-benefit calculations.”61 If the stakes are low for a substantial period of time, it gives private regulators that exist during the early low-stakes times an opportunity to establish such legitimacy. This in turn should make competition from new regulators less likely even if the stakes 56
Regarding competition in transnational governance of labor and forestry, see Bartley 2007 and 2010; Cashore 2002; Cashore, Auld and Newsom 2004; McDermott, Noah, and Cashore 2008; Mosley 2011; Prakash and Potoski 2006; on the larger issue of institutions as instruments of social conflict, see also Knight 1992. 57 E.g. Balleisen 2010, 460-463; Vogel 2005. See also Baron 2003, esp. 55-59. 58 Vogel 1995. 59 Lauterbach 2007. For examples of the creation of competing standard-setters in other issue areas, see e.g., Murphy 2004; Renckens 2010. 60 Targeted firms may, for instance, feel compelled to use/comply with a standard to gain or retain customers who demand it or deal with other situations characterized by a coordination game, see Krasner 1991; Mattli and Büthe 2003; Snidal 1985. See also Morrow 1994 and Pollack and Shaffer 2009. 61 Bernstein and Cashore 2007, 348, who also reject Suchman (1995)'s stretching of the notion of legitimacy to deference based on net-benefit calculations as "pragmatic legitimacy." See also Finnemore and Sikkink 1998; Levi and Linton 2003; and Meidinger 2006.
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rise later, because competitors may not be able to attain comparably broad authority in a high-stakes environment. If a single regulator in a given issue area is for some time preserved as the sole regulator in a low stakes context, it may become especially hard to dislodge that body as the focal point for transnational standard-setting. 3.3. Timing of Institutional Origins A private regulator should be more likely to become preeminent if it is established early, i.e., if it exists as the sole transnational regulator in its issue area for some time before the creation of new, potentially competing regulators is even considered. Being the first international body to set standards in a particular issue area is certainly not a necessary condition for attaining preeminence. Among standard-setters for global financial markets, for instance, the private International Accounting Standards Board (IASB) has become the preeminent regulator in its area of expertise, that is, for setting financial reporting standards. The IASB has become the focal institution even though it (as well as its predecessor, the IASC) was created well after the international organizations that, until the 1990s, were considered equally viable fora for setting global accounting rules.62 Nonetheless, there are two reasons to expect the early creation of a private regulator to make later preeminence more likely.63 First, Robert Keohane's insight that creating international institutions is costly also applies to transnational private institutions and similarly affects the likelihood and form of international cooperation.64 Consequently, an already existing private regulator should be unlikely to be challenged by a competitor as long as the expected gains from the competing set of rules do not exceed the costs of creating a new institution.65 62
The IASB has in recent years attracted considerable analytical attention and, in the financial crisis of 2007-09, also much media attention, since the use of its rules for calculating profits, losses, assets, and liabilities is now required for companies with publicly traded shares or bonds in almost one hundred countries, contributing to the international integration of financial markets. E.g., Büthe and Mattli 2011, chapters 4-5; Camfferman and Zeff 2007; Martinez-Diaz 2005; Mattli and Büthe 2005; Perry and Nölke 2005; Porter 2003; Posner 2010; Véron 2007. 63 Note that this is an argument about formal institutions or organizations, not specific standards. As the competition between VHS and Betamax and various other cases of competing technical standards show, being first to market does not guarantee preeminence; see Büthe and Mattli 2011, chapter 2. See also Christensen 1997. I thank one of the anonymous reviewers for suggesting the clarification. As I will discuss below, such timing also makes a particular path of institutional development—toward a broader scope of authority—more likely. 64 E.g., Keohane 1984; 1989. 65 On the face of it, those costs are not prohibitive for product standard-setting, as small groups of electrical and electronics manufacturers frequently establish new standards consortia where the commercial stakes are high, particularly for information and communications technology
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Second, as social scientists since Max Weber have observed, deference to a rule-maker is at least in part a function of perceiving such a “governor” as legitimate.66 Following Fritz Scharpf, it is analytically useful to distinguish between “input legitimacy,” which refers to the procedures through which decisions are reached and includes the expertise or ex ante recognized competence of the decision makers, and “output legitimacy,” which is based on an assessment of how well the consequences of the decisions comport with broader social norms of distributive justice.67 Yet, as Friedrich Kratochwil has argued, the two notions of legitimacy are not only in tension with each other but also for good reasons tightly linked,68 suggesting that a private regulator can establish legitimacy or authority by exhibiting both effectiveness and competence, i.e., by proving that s/he not only has the requisite expertise but also uses it well. In technical standard-setting, a private regulator would do so by developing highquality standards that at least satisfy the needs of most users.69 A private regulator who arrives early has an advantage with respect to this second issue because it has the opportunity (though certainly not a guarantee) to acquire such expertise-based authority before potential competitors come on the scene. This makes it more likely that such an early regulator will become the focal point for later regulatory activity.70 At the extreme, after some time of having a single focal point for global rule-making, that institution may even acquire what Benjamin Cashore calls “cognitive legitimacy,” where other ways of establishing global standards for a given industry or product range become “unthinkable.”71 The timing of the initial creation of a focal institution for transnational private rule-making also has implications for the scope of the authority of the companies (see Gesmer and Updegrove 2010). Often, however, these consortia do not truly compete with IEC standard-setting. Instead, after settling upon their preferred technological solutions (and after patenting those new technologies), consortia often seek to establish their initially proprietary standards as IEC standards to achieve global reach. This occurred even before the WTO's quasi-delegation of regulatory authority to the IEC in the TBT-Agreement. For instance, the IEC 61966-series of "color management" standards, which define colors in ways that allow reliable communication of information about colors between a broad range of devices with very different ways of reproducing those colors (such as printers and computer screens), are based on standards initially developed by the International Color Consortium (ICC), founded and operated for profit by Adobe, Agfa, Apple, Kodak, Fogra, Microsoft, Sun Microsystems, and Taligent. 66 See Avant, Finnemore, and Sell 2010, esp. 9-14. See also Buchanan and Keohane 2006. Weber's key discussion can be found in Weber 1972 (1921/22), esp. 122-124. 67 Scharpf 1999. 68 Kratochwil 2006, esp. 302-304, 307. 69 I use "satisfy" here based on Herbert Simon's (1987) distinction between optimizing and "satisficing." 70 See also Green 2010. 71 Cashore 2002, 520, based on Suchman 1995. This notion of legitimacy is in conflict, however, with Steven Lukes' (1974) notion of the third face of power.
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private regulator. Specifically, the cost of creating new international institutions should make it more likely that those who wish to see further inter- or transnational regulation (of related issues) will seek to assign the new task to the existing private regulator, thus broadening the scope of its regulatory authority. This variant of institutional “layering,”72 where additional functions are assigned to existing institutional structures, has been shown to be quite common in global public governance,73 and should be similarly expected in global private governance. All of this of course raises the question of how a private regulator comes into existence in the first place—an important issue also for the empirical analysis, since the initial creation of such a private regulator provides a natural starting point for the historical narrative of institutional development.74 On this issue I rely upon the political-economic model for private regulation suggested in the introductory essay, according to which we should expect the emergence of private regulation only if there is both demand for rules (maybe specifically for private rule) as well as a willingness by private actors to supply such rules thanks to opportunities for private gain (or the forestalling of losses that would be incurred in the absence of private transnational governance).75 In the next section, I will examine these hypotheses by examining the creation of the IEC and its development over time on six dimensions: the IEC's institutional structure, its emphasis on being a private body of technical experts as a legitimation strategy, the scope of issues over which it claims and exercises authority, the economic and political stakes in IEC standard-setting, its membership, and its relations with other organizations. 4. The International Electrotechnical Commission, 1906-2010 4.1. The Founding of the IEC: Institutionalizing Transnational Coordination The rapid development of electrical engineering in the late 19th century led to the establishment of national electro-technical societies starting with the British Institution of Electrical Engineers (IEE) in 1871, the French Société Internationale des Electriciens in 1883, and the Austro-Hungarian
72
Schickler 2001; see also Hacker 2005; Orren and Skowronek 2004; Thelen 2003, esp. 226-228. Büthe 2008; Hawkins et al 2006b; Jupille and Snidal 2006. 74 See Büthe 2002, 487f. 75 As Büthe (2010c) points out, such a supply and demand analysis should pay due attention to the targets of the regulations, who may or may not coincide. 73
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Elektrotechnischer Verein in the same year.76 By the end of the 19th century, such organizations existed in most of the “advanced” countries of the day. Professional associations of physicists and electrical engineers, these bodies primarily sought to institutionalize information exchange among their members, though historical documents of their early international meetings also convey that, at the time, having an electro-technical association was increasingly considered a “necessary” part of being a modern, industrializing country.77 The demand for electro-technical standardization arose largely out of these societies, often initially motivated by a desire to have common measures in order to be able to replicate and build on each other's research, but increasingly also out of commercial interest, as the development of electrical technology and machinery proceeded at breakneck speed. The scientists and engineersbusinessmen sought not just domestic private regulation of this new technology but soon also international standardization, as the costs of not coordinating on common units and basic building blocks of electro-technology became apparent when the members of the electro-technical societies began meeting regularly in international congresses. The planning committee for the sixth International Electrical Congress in St. Louis (1904) thus invited all then-independent countries to send official delegates for a special meeting to consider international coordination. In what was essentially an assertion of authority, these delegates issued a formal declaration, calling on the “technical societies of the world” to come together and create a “representative commission” to “consider questions of the standardization of the nomenclature and ratings of electrical apparatus and machinery.” This declaration in turn led to the founding of the IEC by representatives from Austria, Belgium, Canada, France, Germany, Great Britain, Holland, Hungary, Italy, Japan, Spain, Switzerland, and the United States, meeting in London from 26 to 28 June 1906.78 An important motivation for the creation of the IEC and the initial scope of its authority was functional. There was a widespread belief that, for basic research and technological development to be fruitful and cumulative, common terminology, measures, and symbols were needed not just at the national level but, given the rapidly increasing transnational flow of ideas and products, at the international level, too.79 Although convergence on a single standard can occur through market selection among competing specifications, the participants of the early international electrical congresses saw that such harmonization was not 76
The IEE was founded in 1871 as the Society of Telegraph Engineers; it became the IEE in 1889; see Appleyard 1939; Reader 1987. In 2006, it merged with the Institution of Incorporated Engineers to form the Institution of Engineering and Technology (IET). 77 See Finnemore 1992; Meyer 1980. 78 Ruppert 1956. 79 Hughes 1983, esp. 47ff, 79ff, 140ff; see also O'Rourke and Williamson 1999; Rodgers 1998.
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taking place quickly and certainly not without deliberate efforts: The exhibits that occupied the “Palace of Electricity” at the 1904 World's Fair in St. Louis, for instance, not only required electricity of numerous different voltages, but differed in whether they needed direct current or a 1-, 2-, or 3-phase alternating current, with numerous different frequencies for the alternating current.80 Moreover, the slow, limited success of attempts to achieve harmonization through informal agreements in the context of the international Electrical Congresses, which took place at irregular intervals, suggested that ad hoc cooperation was insufficient. Although the delegates of the first International Electrical Congress in Paris in 1881 had succeeded in adopting Ampere, Volt, and Ohm as common “practical units” from among no fewer than 10 different units of electric current, 12 different units of electromotive force, and 15 different units of resistance previously in use, it took another twelve years to agree on common definitions of these units at the 4th international congress in Chicago.81 In their exchanges of letters in first years of the 20th century and in their ensuing discussions in London in 1906, those who founded the IEC explicitly expressed the hope that institutionalizing this kind of cooperation—giving it a formal institutional structure—would facilitate and speed up standardization on a global level.82 Harmonization of previous divergent standards, however, creates winners and losers. A functional explanation for the creation of the IEC ignores these distributional implications. Taking them into account calls for greater attention to who the main actors were. The official delegates at the 1904 Electrical Congress in St. Louis and the 1906 founding meeting in London were mostly private individuals, though often highly respected technical experts in physics or engineering at universities or polytechnic institutes and usually selected by their national electro-technical societies. It was this group that initially defined the general issue area over which the IEC was to acquire regulatory authority. Scientific considerations and the desire to advance the understanding of electricity and related phenomena surely motivated many of them. But commercial rather than purely scientific interests were the driving force behind electro-technical standardization at the national and international levels. Inventors and commercial developers of electric technology and machinery realized, in particular, that the lack of standardization of such basics as the type of current (direct vs. alternating), or even the way in which voltage was measured, impeded their ability to achieve economies of scale in the production of anything from light bulbs and telephones to electrically powered machinery.83 And most of the key participants in IEC standardization were willing to “supply” global governance 80
See Erdmann 2009 for details; see also AIEE 1904. Raeburn 2006a. 82 See, e.g., IEC 1906, passim. 83 E.g., Erdmann 2009, 4; Paxton 1954, esp. 244f. 81
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because they played an important role in industrial applications of the new electro-technology and thus had a direct stake in the specific content of the rules governing the technology.84 Usefulness for the development of technologies with commercial application was consequently a key criterion for where to focus standardization efforts; and protecting or enhancing the value of one's technology and patents often drove support and opposition to the development of any particular standard. The rapid advances in electro-technology at the time, however, ensured that standardization usually opened many more new, profitable opportunities than it foreclosed. And IEC standardization was often close behind the cutting edge of technological development, so that some of the early international standards were developed before national standards had been firmly established and before a great many had developed a stake in a particular standard or practice. In the realm of electro-technology, the speed of innovation in the first decades of the 20th century not only created an opening for private transnational governance by technical experts, but also helped electro-technology in its early years to avoid the kind of lock-in that can impede shifting to a superior new standard.85 The stakes in the early years were therefore only occasionally very high, and drawn-out battles were rare. It is also noteworthy which stakeholders were not sitting at the table. Governments were notably absent, as discussed in more detail below,86 but other forms of exclusion are equally or even more important for understanding agency in the creation of this early transnational private regulator. Reflecting the social status afforded to many of the pioneers of the “electrical age,” the founding meeting of the IEC in June 1906 was held in London's premier luxury hotel, the Hotel Cecil, assuring in effect (if not necessarily intentionally) the exclusion of 84
Many of the key figures, such as Ichisuke Fujioka (Japan), Lord Kelvin (UK), Elihu Thomson (US), and Eugen Wüster (Austria) had both scientific and commercial interests. Even the German Physikalisch-Technische Reichsanstalt, founded in 1887 as an incubator of scientific knowledge to supercharge Germany's electricity-driven late industrialization, owed its existence and success at least as much to Werner von Siemens as "first man of German industry" as to Hermann von Helmholtz as "first man of German science;" see Cahan 1989. See also Cahan 2010; Warburg 1916; Yates and Murphy 2008. 85 David 1985. 86 See section 4.6. The delegates of Hungary and Spain to the 1906 London meeting were officially representing their Ministries of Commerce, but it was for instance the private Elektrotechnischer Verein, not any government agency, that became the IEC member for Hungary. Some of the leading figures in national electro-technical societies had appointments in public universities or as lead scientists in publicly funded research institutes. Yet, even they hardly acted predominantly as representatives of the state. Rather, the scientists and engineers who were the individual actors in the technical discussions in the early years often acted as representatives of industry or even of their own commercial interests, as many of them had a personal financial stake in the commercial applications.
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stakeholders from poorer parts of the world. The organizational features of the IEC (some of them arguably inevitable, given the technology at the time) also meant that only those able and willing to pay the costs of international travel were able to participate fully in IEC standardization, since participants paid their own way, even though they officially attended all meetings as representatives of their national electro-technical societies. This, in turn, affected who a national member body could appoint to be the country's official representative to any IEC meeting. The structure, rules, and norms of those domestic-level institutions might have ensured that the national delegates represented a reasonably broad set of interests. Yet, the material costs of participation clearly created a bias in favor of commercially successful stakeholders from rich countries. From the start, economic resources, technical expertise, and institutions at the domestic level thus determined what interests would be represented at the international level. 4.2. Institutional Structure and Procedures of the IEC, 1906 - 2010 The initial institutional structure of the IEC was simple. When the organization was founded, standard-setting was carried out through correspondence and regular plenary sessions every two to three years, during which agreed standards would be formally adopted as “Technical Recommendations.“ This technical work was entirely in the hands of electrical engineering experts from the IEC “national committees” (the member bodies of the organization). Their work was supported by a small Central Office, established in 1906 in London (hosted by the British Institution of Electrical Engineers)87—with Charles LeMaistre as its General Secretary from 1908 to 1953.88 Having its own permanent staff, however small, gave the IEC from the start some institutional capacity to pursue its organizational self-interest, though it focused during the early years primarily on administrative support to foster the organization's effectiveness as a private regulator. Soon, however, proposals for standardization work became too numerous and electro-technologies too differentiated to discuss every issue in the plenary meetings. The member bodies of the IEC therefore agreed to assign the detailed technical work to more specialized “advisory committees” (today's Technical Committees, TCs), starting with the committee for terminology in 1911.89 Delegating the technical work to more specialized committees was accompanied by the institutionalization of what are today known as the General Meetings, which bring representatives from all of the national member bodies together in one place once a year.90 87
IEC 1906; Ruppert 1956, 3. Yates and Murphy 2008, 16. 89 Yates and Murphy 2008, 17n53. 90 The actual process of setting standards is discussed in greater detail below. 88
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By the mid-1920s, the number of specialized standard-setting committees had grown to more than 15, which prompted the IEC leadership to create the Committee on Action (predecessor of today's Standardization Management Board, SMB) to coordinate the activities of the various committees and ensure that the decentralized work of the technical experts served a common purpose (see box). Early on, the institutional structure of the IEC thus became one of hierarchy (see Figure 1).
Central Office incl. SMB
94 Technical Committees 80 Subcommittees
404 Working Groups
213 Project Teams + 501 Maintenance Teams
Figure 1 IEC Institutional Structure, 2010 Author's diagram based on IEC Annual Reports and ”IEC in Figures”; current as of 1/1/2010.
This structure, essentially established by the late 1920s, retains the early emphasis on bottom-up agenda setting and decentralized technical rule-making, but also gives the IEC leadership the capacity (if it has support from a majority of the member bodies represented on the Standardization Management Board), to intervene in pursuit of the organizational self-interest of the IEC, for instance to ensure that IEC standards continue to meet the technical needs of users.91 91
By all indications, these efforts have been successful, at least concerning stakeholders well positioned to develop and/or to use alternative standards or otherwise challenge IEC's
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Crucially, the power to establish new technical committees, if there is stakeholder demand or support for it, provides the SMB with an easy way to extend the IEC's regulatory authority into new (electro-technical) issue areas, as examined below (see section 4.4). Although the structure of IEC is in many ways remarkable for its persistence over time, IEC leaders in the Central Office and the SMB have made numerous changes in the operations and procedures over the years in pursuit of the IEC's organizational self-interest in assuring its continued relevance and desirability as the transnational forum for setting electro-technical standards. These changes have included cutting back on most of the multi-lingual translation work in order to reduce costs and therefore minimize increases in fees charged to the national committees (member bodies).92 They also have included a push for electronic distribution of technical documents and electronic balloting, which has not only reduced costs but also saved substantial time, allowing the IEC to bring down the average time from the acceptance of a proposal for a new standard to the adoption of the new IEC standard from 5-8 years in the 1970s and 1980s to less than 3 years today—essential for minimizing the attractiveness of industry consortia as alternative standard-setting institutions.93 The capacity of the IEC leadership and the SMB to safeguard the organizational interests of the IEC as a whole are particularly important because so much of the daily work of IEC standard-setting is not directly controlled by the Central Office.94 Technical committees coordinate their activities through the Central Office, but otherwise operate largely independently. The ten thousand individual technical experts who participate in IEC standard-setting each year are nominated by (and officially represent) the national member bodies (“National Committees”) of the IEC. These national standards organizations (many of which form “mirror” committees at the national level for each IEC committee in which the country participates) play a crucial role in the transnational private regulation as practiced by the IEC. Moreover, every IEC technical committee has a chairman and a secretary/secretariat. The secretariat provides the administrative support for (and in-between) the meetings of the committee, a practice introduced in the midpreeminence. Although no systematic data exist on the level of use or implementation of IEC standards, it is clear that many IEC standards—from basic measurement standards to detailed specifications for high-tech products—are widely used in hardware and software design, industrial processes, product specifications for internal use and purchase orders, and increasingly also in government regulations. 92 See also Teichman and de Vries 2009. 93 The records for the average time to develop a new standard in earlier years make it difficult to calculate precise times for the 1970s/80s (interviews at IEC, May 2008); in 2009, the average time was 33 months (see IEC 2010a). 94 The process of setting standards in IEC is discussed in detail elsewhere (Büthe and Mattli 2011, chapter 6) and more briefly in section 4.3, below.
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1920s to control the operating costs of the IEC Central Office;95 the chair conducts the meetings. Unlike in ISO, where committee secretaries are often staff members of the national member body, IEC secretaries are usually standards experts from private industry, though their national committees rather than their individual employers provide the resources for the administrative work.96 Committee secretaries and chairs are appointed by the SMB (see box). The distribution of chairmanships and especially secretariats across countries (see Figure 2) is not just a measure of involvement in the organization but also a source of institutional power, since these positions provide opportunities to exert considerable influence through the ability to set or control the agenda and through the early access that it affords to information about forthcoming agenda items. &#" &!" %#" %!" $#" $!" #" !"
Figure 2 IEC Technical Committee and Subcommittee Secretariats, 2010 Author's calculation based on annual reports and the website of the IEC.
In sum, the IEC developed early on—and over the years has continued to refine—an institutional structure to channel and amplify the expertise of the 95
Ruppert 1956. As noted by Jack Sheldon, Standardization Strategy Manager of the IEC, the practice of having an industry practitioner as TC or SC secretary was consciously sought by the IEC leadership to ensure relevance since it gives industrial users a more direct role in the standard-setting process (interview, Geneva, February 2009). The costs of providing secretariat administrative services do not count toward a member body's contribution to the IEC budget. See also Teichmann 2003. 96
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The IEC Standardization Management Board The Standardization Management Board (SMB) is a special committee of the IEC, responsible for the coordination and strategic planning of the technical work throughout the organization. It oversees and coordinates the work of IEC's 174 Technical Committees (TCs) and Subcommittees (SCs), with their 400+ working groups, 200+ project teams, and 1410 ongoing standards projects. It thus plays a central role in IEC standardization. The SMB has the right to establish, disband, merge, or split TCs or re-assign work between them. For instance, TC12 (one of the oldest IEC committees, responsible for radio communications) in 1995 was merged with TC60 (recording equipment) and TC84 (audio, video, and audiovisual engineering), because technological developments had rendered the distinctions between the three TCs less and less meaningful and interoperability between different audio, video, and communications devices was becoming a key issue for consumer electronics. The SMB thus pursued the IEC's organizational self-interest in retaining its relevance to industry (and arguably other stakeholders). The SMB also allocates TC secretariats to national member bodies of the IEC and appoints a chairman for each TC (upon nomination by the committee's secretary, usually from a different country). It must approve any change in scope of a TC. Finally, the SMB is responsible for strategic priorities and relations with other organizations, adjudicates jurisdictional conflicts between the TCs, maintains the rules for the technical work, and settles any questions over their interpretation, including appeals concerning ballots on developing new standards or approving final drafts as IEC standards. Who sits on the SMB and thus exercises these powers? An IEC Vice President and two IEC senior staff members sit on the SMB ex officio. Through them, the IEC leadership has (non-exclusive) agenda-setting power. In addition, the SMB has fifteen voting members. Six of these fifteen seats are reserved for the six member bodies that make the largest contributions to the IEC budget and provide the staff support for the largest number of technical committee secretariats.* The remaining nine seats are filled for three-year terms through elections in the assembly of the member body presidents, the IEC Council. For the elected seats, the Rules of Procedure stipulate that member bodies shall aim for a “balanced geographical distribution” among qualified candidates.‡ *
For allocating the six appointed seats, budget contributions and committee secretariats are each calculated as a percentage of the total and the percentages are added together. In case of a tie, committee secretariats are given greater weight. See IEC 2005, Appendix 1. ‡ The information in this box is based on ISO/IEC 2009; IEC 2005; IEC 2010a; personal communications with Jack Sheldon, IEC Standardization Strategy Manager; and interviews with members of IEC technical committees and national member bodies, who confirmed that actual practice conforms to the formal rules as summarized here.
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individuals who come together at the IEC (through the national committees) as a resource for global governance. This institutional structure, which allows for an extension of IEC standard-setting into new electro-technical issue areas through the creation of new committees, is supplemented by decision-making procedures that allow for adding new standards projects to a committee's agenda with relative ease, as discussed below. The official list of tasks for TC 111, formed in 2004 to harmonize the approach to environmental issues in IEC standard-setting across all its other product-oriented committees, conveys clearly the extent to which the IEC is conscious and strategic in its approach to its own role. The tasks assigned to the committee include to “monitor closely the corresponding regional standardization activities worldwide in order to become a focal point for discussions concerning standardization.”97 4.3. Safeguarding Autonomy and Legitimacy: The IEC as a Technical, Non-Governmental Regulator Just as the IEC's institutional structure and its formal process for setting standards has changed little over time, the informal institutions through which it has sought to acquire and maintain its legitimacy and safeguard its autonomy have been characterized by remarkable persistence. Most notable here are the emphasis on technical reasoning and on the non-governmental character of this transnational regulator. Regulatory bodies that rely upon a reputation for technical expertise to legitimate their rule-making have strong incentives to avoid overt politicization, since the recognition of political influence undermines their expertise-based authority. The IEC therefore adopted from the beginning a strong norm that all participants in the standard-setting process must provide electro-technical reasons for the positions that they are taking. Arguments for or against developing a new standard, as well as arguments for the inclusion or change of specific provisions in the technical specification during the standards-developing process, must be accompanied by a scientific or engineering rationale that can be investigated. None of this is to say that technical standardization can be reduced to a scientific optimization problems nor that IEC standardization is hereby transformed into a harmonious process, as some have suggested.98 As illustrated by AMP's success in IEC standard-setting for optical connectors, those who have the financial and technical resources can (attempt to) use technical and scientific reasoning instrumentally to achieve standardization outcomes that yield commercial advantages or shift adjustment costs to others. 97 98
Official "scope" of the work of TC111, as noted in IEC 2010b. Loya and Boli 1999.
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0
Preliminary Stage
1
Proposal Stage
2
Preparatory Stage
3
Committee Stage
4
Enquiry Stage
5
Approval Stage
S P E C IF IC IT Y
The core procedural norm of IEC standardization—that a technical rationale must be presented for all objections—provides no safeguard against a strategic and political use of science and engineering. Nonetheless, the norm has real power.99 The norm that participants must engage in technical reasoning matters, above all, because it is embedded in a broader norm that any such argument, duly submitted as a national position during the IEC “consensus” standard-setting process, must be discussed and—if it has technical merit—accommodated to the greatest possible extent.100 And the norm of technical reasoning matters, because it is enforceable by committee chairs during the deliberations and by the IEC Central Office during the final stages of the standard-setting process, as discussed below.
Figure 3 IEC Standard-Setting Process
99
See also Büthe 2010b. As noted above, consensus does not mean unanimity. Rather, it means, during the standardsetting process, the absence of opposition for which technical reasons are provided, and during the enquiry and approval stages, support for the new draft standard from substantial super-majorities. 100
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After a standards project is successfully launched in the “Proposal” stage, during which its core objectives are specified,101 successively more specific drafts of the new standard are developed during the “Preparatory” and “Committee” stages (see Figure 3).102 During the “Enquiry” stage, a bilingual “Committee Draft for Voting” (CDV) is then circulated among all of the national member bodies (regardless of committee representation) for comment and an initial vote. If the CDV passes this vote, the TC or SC revises the standard one last time to take into account technical comments that may have been submitted along with or in lieu of a vote.103 The resulting revised standard is then during the “Approval” stage circulated among all national member bodies as a Final Draft International Standards (FDIS) for an up or down vote.104 If a member of a technical committee fails to provide a technical reason for his or her position, or if a national committee submits a negative vote without scientific or engineering rationale or proposals for improvement, the committee chair or the IEC central secretariat may dismiss such objections (and the negative votes) for lack of a “technical basis.”105 Claims overtly based on commercial interests or attempts to invoke other reasons for getting one's way—such as market share, size of the national economy, or other traditional “power resources” of international politics—can thus be easily dismissed to safeguard the organization's expertise-based legitimacy. Figures 4 and 5, respectively, summarize the results of the ballots for 1578 CDVs and 1509 FDISs from January 1999 to September 2002. At both stages, every member body has one vote, and moving forward requires that two-thirds of the submitted, non-abstention votes from the P-members of the committee that developed the standard vote in favor of the draft and that no more than 25% of all vote-casting member bodies vote against it.106 Since blank or abstention votes are not counted for the denominator, adoption of an IEC standard thus effectively
101
The Proposal stage is preceded by a "Preliminary" stage, during which interested stakeholders explore the level of interest in developing a new standard at the international level in often informal discussions within and among member bodies. 102 For details, see Büthe and Mattli 2011, chapter 6. 103 If there are no negative votes at all, the Committee can decide to treat the CDV ballot as final and submit the standard for publication. 104 Member bodies may vote "abstention.” If approved, the standard is then published by the IEC Central Office. 105 ISO/IEC 2009, Art. 2.6.3, 2.7.3. 106 ISO/IEC 2009. Interviewees with many years of experience in IEC standardization confirmed that these formal institutional rules indeed describe IEC practice. The one-country-one-vote system does not, of course, mean that all countries are equal in IEC standardization. Countries with greater scientific and engineering expertise and an ability and willingness to devote more resources to the IEC standardization process clearly are in a better position to influence IEC standards than poor, developing countries.
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requires a 75% super-majority. In Figures 4 and 5, any ballots above the diagonal line failed to garner this majority. The figures show that private regulation by the IEC is hardly uncontroversial. More than 40% of IEC standards are still opposed by at least one country and often several by the time they reach the CDV voting stage. At the same time, the share of no-votes (and the number of draft standards that fail) substantially declines from the CDV to the FDIS stage.107 IEC Committee Ballots on CDVs
0
Number of No−votes 5 10
(Committee Drafts for Voting)
0
10
20 30 Total committee votes per ballot
40
Area of circle proportional to number of ballots
Figure 4 Author's calculations based on IEC data covering 1578 CDV ballots from Jan 1999 to Dec 2002.
Minutes from technical committee meetings and interviews with participants confirm that the decline in opposition is explained in part by technical compromises and the accommodation of technical objections, but also by numerous national committees dropping their objections because their technical reasoning could not be maintained. In sum, the IEC norm demanding technical reasoning has a real effect on the process of rule-making; it ensures that sometimes intense conflicts of political-economic interest are blunted—at least in appearance, because they are carried out in terms of scientific/engineering 107
The draft standard failed to get a 75% majority in 86 CDV ballots (5.4%), whereas it only failed in 27 FDIS ballots (1.8%). The same pattern emerges when the 2/3 threshold is used, which is the requirement for P-members: CDVs failed to reach that threshold in just under 2.2% of all CDV ballots; FDISs failed to reach that threshold in only 0.3% of the FDIS ballots.
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optimization and highly technical language—and it prompts those who might be able to push a standard through the voting stage to broaden the support for the standard among IEC members who participate in the voting process. Such participation, of course, is crucial since studies of winners and losers in IEC standard-setting suggest that those who lose market share and commercial opportunities as a consequence of IEC standardization are, above all, from countries that failed to pay attention to the transnational rule-making and who failed to vote at all.108 IEC Committee Ballots on FDISs
0
Number of No−votes 5 10
(Final Draft International Standards )
0
10
20 30 Total committee votes per ballot
40
Area of circle proportional to number of ballots
Figure 5 Author's calculations based on IEC data covering 1509 FDIS ballots from Jan 1999 to Dec 2002.
Similarly important is the IEC's commitment to being a private—nongovernmental—regulator, which also has a long tradition. The IEC itself was established in 1906 as a private organization, and it has remained—sometimes adamantly—nongovernmental to this day. Moreover, the founding documents explicitly called for national technical societies, rather than for governments, to constitute each country's “local [IEC] committee” and appoint representatives to the IEC. The explicit objective of this preference against governments as members was to have no “bureaucratic influence imported into the
108
E.g., Büthe and Mattli 2011, chapter 7; de Vries 2006; Mattli and Büthe 2003.
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Commission.”109 Although numerous national committees from developing countries are government agencies, hybrid public-private bodies, or substantially government-funded organizations, the IEC recognizes as members only the technical agencies or organizations, not governments or states as such. The nongovernmental character of the IEC further restricts the fungibility of power resources.110 Economically or militarily powerful states have often been able to use seemingly unrelated power resources to influence outcomes in international governmental organizations, such as the International Telecommunications Union (ITU) and the WTO—allowing their economic interests to sometimes dominate the preferences of smaller/weaker states.111 In IEC standardization by contrast, attempts at direct governmental interference are considered illegitimate and are rarely even tried: In Büthe and Mattli's survey about international product standards among manufacturing firms in five industries, barely 6 percent of those who most frequently use IEC standards said they “sometimes” or “often” ask for help from the government. Stakeholders from small countries, such as Sweden, which have the requisite expertise and make the effort to participate very actively in this form of transnational private regulation, are no less influential than comparable stakeholders from large, seemingly more powerful countries. In sum, the IEC appears to have been successful in keeping overt politicization at bay, even if the institutional process of setting standards for global product markets may itself be at least as much a political as a technical process.112 4.4. Expanding Scope of IEC Private Regulation, 1906 - 2010 In the early years, the IEC focused on measurement, nomenclature, and symbols. It established electrical and magnetic units such as Hertz and Gauss, and developed a unified “International Electrotechnical Vocabulary” (now the 13language IEC Multilingual Dictionary, first published in 1938). These were essential building blocks in the industrialization process, the formation of international markets, and the development or “social construction”113 of electrical engineering as a universal (global) scientific profession.114 109
IEC 1906, 10. Governments were to be asked to appoint a local committee only in countries "having no Electrotechnical Institution," and if technical societies were subsequently founded in those countries, they could appoint a new local committee; see IEC 1906, 18, 20. 110 See also the discussion of the technical reasoning norm above. 111 E.g., Krasner 1991; Steinberg 2002. 112 Büthe and Mattli 2011, chapters 6-7. 113 Herrigel 1996. 114 Ruppert 1956, 4f. Engineering was just starting to become a distinct occupation at the time and as many other white-collar occupations, engineers sought to emulate the traditional liberal
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While basic terminology, symbols, and measurements remain important areas of IEC standardization work, the IEC has over the years vastly broadened the scope of its rule-making activities. Developing standards for consumer products, which the IEC added to its portfolio in the 1920s (starting with the U.S.chaired technical committee for “lamp sockets and caps”), grew into a major area for the IEC after World War II, thanks to the widespread electrification of households throughout advanced industrialized countries and the mass-market production of electrical devices for household use.115 As new electro-technologies were developed, the scope of transnational rule-making broadened: The IEC added technical committees for computing and information-processing standards in the 1960s, for laser equipment in 1970s, for fiber optics, superconductivity, and wind turbines in the 1980s, and for fuel cell technology in the 1990s. Among the latest additions are standards for flat-screen panels, for nanotechnology in electrical and electronic products, and for “marine energy,” i.e., the conversion of tidal and other water currents into electric energy. This broadening scope of IEC authority may be partly functionally explained by technological change. Setting up a committee to develop technical standards that safeguard against magnetic interference from the operation of electrical devices would have made little sense until such interference occurred; a technical committee on fiber optics was literally unthinkable until after fiber optics had been invented. Technological change thus created the demand for global governance of these technologies. But such change is merely a necessary condition, and supply as well as demand for private regulation must be explained.116 Part of the supply may be easily explained by the predictability of gains. Transnational or global technical standardization should generally be in the interest of those who are competitive producers and who would benefit from the increased market size that comes with regulatory harmonization. These producers should consequently push for the IEC to expand its issue space to include the technical issues that impede their global market access by requesting that their national IEC committee propose the development of standards or the establishment of new technical committees or subcommittees to cover those issues. And if they also have the technical expertise to develop a particular standard, they should be willing to do so as long as the difference between the standard that they expect to be developed with their participation and the standard (or non-standard) that they expect to be developed without their participation exceeds the cost of supplying private regulation.
professions (doctors and lawyers); see Gispen 1990; Lagerstrom 1992; McMahon 1984. See also Abbott 1988; Brint 1994, esp. 5; and Sciulli 2005; cf. Jarausch 1990. 115 Onken 1919; Raeburn 2006a; Ruppert 1956, 6f. 116 Büthe 2010c.
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This willingness to supply private regulation by suppliers who are also in the demander subset of stakeholders is amply evident in an analysis of proposals for developing a new standard. Such proposals for “new work items” can be put forward by any IEC national committee (following its own rules), any technical committee, the secretariat of the committee that is to develop the standard, the SMB, or the IEC's chief executive officer. Each proposal specifies the technical committee that should develop the new standard, and only the “P-members” of that committee—the national member bodies whose representatives regularly participate in the technical work of that committee—vote on the proposal. Reflecting the IEC's organizational self-interest in allowing an easy extension of the scope of its authority,117 acceptance of the new work item requires a positive vote from only a simple majority of the P-members of the specified TC or SC.118 To assess the effect of these requirements and the breadth of support (or opposition) for new IEC standards among the IEC national committees, I obtained the complete record of votes on proposals for “new work items,” submitted by P-members from August 1999 through September 2002.119 453 proposals for new standards came to a vote during those 38 months.120 The distribution of the 453 ballots is shown in Figure 6.
117
See the discussion of "layering" in section 3.1. It also requires a commitment from a minimum number of P-members to participate actively in the development of the standard. This minimum number is 4 for committees with 16 or fewer Pmembers and 5 for committees with 17 or more P-members; individual TCs/SCs may raise the minimum threshold (IEC 2005 and interviews with Jack Sheldon, Oct. 2007 and Jan. 2008). The decision whether to revise an existing standard follows a different procedure: When a TC or SC approves a standard for publication, it also decides when the next review of that standard should occur (this "maintenance procedure" is specific to each standard). The date set at that time must be at least two and no more than twenty years into the future. As that date approaches, the P-members of the committee with responsibility for the standard form a "maintenance team" to review all proposals for changes submitted since the last revision. They then decide whether to develop a revised standard, confirm the standard without changes for some period (newly specified at that time), or possibly even withdraw the standard. The IEC thus guarantees that a standard, once adopted, will remain unchanged for at least the time specified in the maintenance procedure, thus assuring users that they will not have to face further switching costs for the specified number of years. 119 The start of the time period covered by the data was dictated by the beginning of electronic balloting for new work items proposals. The end (September 2002) was the presumably arbitrary end of an IEC-internal study, for which the original data set was compiled. I am grateful to the IEC for making the data available to me. 120 Since committee membership varies, the number of national committees eligible to vote on any one proposal ranged from 9 to 36 for the proposals for new work analyzed here. 118
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IEC Committee Ballots on New Work Item Proposals
0
Number of No−votes 5 10
(Proposals to Begin Work on a New Standard)
5
10
15 20 Total committee votes per ballot
25
Area of circle proportional to number of ballots Total votes excluding abstentions
Figure 6 IEC Committee Ballots on New Work Item Proposals, 1999-2002 Source: Author's calculations based on IEC raw data.
Only 1 proposal to a committee of 16 or fewer p-members failed to get four positive votes.121 Three of the 453 proposals (one in 1999, two in 2001; 0.7%) failed to gather a simple majority; and only two of the three had more negative than positive votes. Transnational standardization, however creates not just winners but also losers. One should expect opposition at least from those who previously benefitted from the protection afforded by differing national or regional standards. It is therefore also necessary to explain why actors who sought more IEC governance have persistently won out over those who opposed it. In fact, those who oppose a broadening of the IEC's issue scope have some options, but none of them is particularly promising as a way to forestall an extension of IEC regulatory authority for long. Organizing at the domestic level to keep one's national committee from submitting a proposal for a new standard or a new technical committee is one option. Yet, given that proponents can try to put a proposal on the agenda via any national member body, opponents would have to defeat such proposals domestically in each country to keep them from coming up in the 121
Positive votes do not commit national committees to participate in the technical work, but those commitments are not separately recorded in the data; anecdotal evidence suggests that the correlation is very high.
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IEC—which is increasingly unlikely after several decades now of ever more industries becoming ever more internationally oriented.122 Once the proposal is on the table at the IEC, forestalling the extension of IEC authority requires either building a coalition of national IEC committees opposed to IEC governance or challenging the new IEC rules by writing competing rules and fostering their adoption by users. Yet, although it is in principle possible to build a transnational political coalition of domestic actors opposed to transnational politics,123 doing so in the IEC would require convincing technical experts, who, as representatives on IEC technical committees, devote substantial amounts of time to providing private regulation for global markets, that such transnational governance is undesirable or illegitimate, at least for the issue at hand.124 And given the increasingly broadbased membership of the IEC (see below), challenging it by seeking competing standards through other organizations is unlikely to succeed. In sum, the institutional structure examined in section 4.2 is supplemented by decisionmaking procedures that further facilitate an expansion of the IEC's scope of authority by making it easy to put an issue on the IEC standardization agenda. 4.5. Changing Stakes in IEC Standard-Setting The first IEC standards concerned terminology and symbols, as well as fundamental measurement issues, such as how exactly to gauge the resistance of various metals, so that information about industrial products, such as copper wire, as well as information about scientific experiments would be reliable.125 These seemingly mundane issues had often significant commercial implications. Decisions about basic units affected the value of patents,126 and as Arthur E. Kennelly, by then professor of engineering at Harvard, noted in his presentation at the 1904 Congress, a difference of “1/10th of a Volt” in 110 Volts could—given the technology of the times—make a difference of “large sums of money in regard to a contract for incandescent lamps.”127 Nonetheless, most of the early 122
See Milner 1988; Dicken 2003, esp. 198ff. Bob 2010. 124 Technical arguments are unlikely to suffice to keep the IEC from developing a standard as such, though they certainly can be successful in changing the specific provisions of that standard. 125 E.g., Onken 1919. On the history of the international system of units more generally, see Teichmann 2001. 126 This was the main reason, for instance, for Thomas Edison's ruthless multi-year campaign— which inter alia led to the invention of the electric chair—to keep the United States from adopting alternating rather than direct current as the standard for household electrification (see McNichol 2006). 127 Erdmann 2009, 4. Kennelly was a self-taught physicist who started out as an office boy for the Institution of Electrical Engineers to become one of the most important theoretical contributors to our understanding of radio waves. 123
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IEC standards opened up many more commercial opportunities than they foreclosed, so IEC standardization, where it took place, closely resembled a coordination game with large gains from coordination and relatively small distributional effects. Even the effects on international trade were initially limited. To be sure, IEC standardization of fundamental units, measurements, and ratings made it possible for producers to “intelligently prepare bids for equipment made in accordance with the specifications of any other country,” as the Assistant Director of Engineering of Westinghouse, one of the leading American manufacturers of the day, pointed out in 1928.128 For companies in the electrical industries, however, increases in exposure to international competitors remained nonetheless low.129 As a consequence of this sequencing of the fast increases in the scope of the IEC's authority and the much slower increases in the commercial stakes (see section 3.2), the IEC could relatively quietly establish itself as the focal point for international electro-technical rule-making, even with “cognitive legitimacy:“ Measuring voltage and frequency for electrical currents in ways or units other than those established by the IEC as the international standard units in its first decades is today literally unthinkable. The stakes in IEC standardization grew—slowly at first—with international trade after World War II. The increased attention to international standards after WWII, however, was initially primarily a European phenomenon, with American encouragement but little U.S. participation130—until the mid1950s, when American firms began to discover the costs of having ignored international electro-technical standardization. A 1964 study of the economic effects of American (non)participation in IEC standardization shows, for instance, that an IEC standard for electrical capacitators, which inadvertently rendered common American designs unacceptable, cost U.S. manufacturers substantial market share. Losses in the millions of dollars in U.S. exports (in mid-late 1950s dollars!) were averted or reversed through U.S. involvement in the development of IEC standards, which made inch-based mounting specifications for motors and generators and for drawings on wire boards acceptable to European customers and government regulators.131 The commercial stakes in IEC standardization were thus increasing, though IEC standards still had substantial distributional implications only for a small share of manufacturing firms. It was not until the intensification of economic globalization in the 1980s and 1990s, discussed in section 2, that IEC standard-setting became a high-stakes game for a large number of companies. In a nutshell, the international and 128
Skinner 1928, 155. Condit 1928, 40. 130 Mason 1954. 131 U.S. National Committee of the IEC 1964. 129
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increasingly global integration of product markets created demand for international standards. Delegating international harmonization of technical standards to the IEC was an attractive solution, especially since the use of IEC standards was not mandatory as such, which made the science and engineering experts at the IEC non-threatening to governments and most domestic stakeholders. And competitive or strategic producers were quite willing to supply new rules for global product markets through participation in the requisite IEC technical committees.132 Some, to be sure, would have preferred to have no international standards; others preferred more specifically not to have the IEC develop standards. By the 1980s, however, the IEC was well-established as the focal point for private regulation of electro-technology.133 And as the IEC went from an annual output of less than 100 standards per year in the 1970s to more than 300 per year in the early-mid 1990s (when the WTO's TBT-Agreement committed all WTO member states to the use of international standards) and about 450 standards per year in the later 2000s,134 more and more products and industries were affected by the IEC's private rules. The WTO's TBT-Agreement, discussed in greater detail in section 4.7, also increased the stakes for products and industries already covered by IEC standards, since it prompted government regulators as well as private market participants in many more countries to rely upon IEC standards to specify quality or safety characteristics or to ensure the interoperability of individual products or entire systems. As a consequence, even U.S. manufacturers of electrical or electronic products who might have ignored international standardization, because they assumed that the “objective” quality of their products trumped compliance with technical norms written by a transnational organization (or because it “only” affected their European export opportunities135), can today scarcely afford to ignore IEC standard-setting lest they risk being shut out of much of the global marketplace, including many of the largest and fastest-growing developing country markets.136 At the same time, creating viable competitors to IEC 132
Delegation of standard-setting to the IEC also merely extended to the international level the domestic practice of government endorsement of standards developed by private-sector bodies; see Braithwaite and Drahos 2000; Brunsson and Jacobsson 2000a, 10ff. 133 E.g., Electroindustry Magazine 2001. 134 Source: IEC Annual Reports and IEC in Figures (various years). 135 The special importance of standards and regulations in transatlantic trade is discussed, e.g., in Pollack and Shaffer 2001 and Büthe and Witte 2004. The particular tendency of U.S. manufacturers to short-sightedly ignore international standardization has been noted repeatedly, including in reports by the Office of Technology Assessment (OTA 1992) and the Congressional Research Service (Ahearn 2008). 136 The increasing importance of product standards for developing countries, not just as impediments to their exports but also as instruments of governance of their domestic markets—not
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standards (or to the IEC as the standard-setting institution) is difficult, precisely because comparable benefits of market access, economies of scale, etc. could only be achieved by convincing (regulators and private users in) a large number of countries to switch. Such a switch has been made ever more unlikely by the IEC's success in broadening the set of countries where a significant subset of stakeholders benefits from the IEC's centrality in global governance. 4.6. Expansion of IEC Membership From 9 national committees that had become official members by 1908, when the IEC held its first meeting after it was constituted, the IEC grew to 27 members (one per country) by 1939, when the start of World War II put the organization on hold for the duration of the war. The now 59 full member bodies pay annual dues, which depend upon each country's size and level of economic development, measured by its GDP and level of electricity consumption. In addition, the IEC has 22 associate members, whose technical experts may sit on up to 4 technical committees, and 81 “affiliates.”137 The 27 pre-WWII IEC members included four national committees from non-European developing countries—India, Egypt, China, and South Africa—but the IEC appeared during its early decades perfectly content with a relatively small, homogenous membership. Limiting the membership to the countries whose private industries were at the forefront of the scientific and commercial development of the various electro-technologies was even seen as desirable since their technical and socio-economic elites were presumed to share a common understanding of modern science and engineering.138 As decolonization changed the world after World War II, IEC membership grew to include countries such as Indonesia in 1954 and Pakistan in 1959. Brazil (1952), Turkey (1956), South Korea (1964), and Iran (1966) also became full members—as much for the symbolism of being part of an international technical/scientific elite organization as for the tangible benefits membership would bring for their industrialization process. Yet, generally, until the 1980s, the IEC did not actively seek to broaden its membership, which consequently grew slowly during the Cold War years (see Figure 7).139 least to foster the international competitive of their domestic industries—is discussed, e.g., by Maskus, Otsuki and Wilson 2005; Mold 2005; Rege, Gujadhur, and Franz 2003; and Stephenson 1997. 137 Associate membership, intended for small or developing countries with a stake in only a limited number of electro-technologies, offers limited participation rights in exchange for reduced membership fees. Affiliate status offers non-voting participation and access, only. 138 E.g., Ainsworth 1964, 364. 139 Remarkably, the Cold War interfered relatively little in the operations of the IEC. The countries of the Eastern bloc who had previously been members of the organization all retained their full
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The end of the Cold War then brought major changes—even before the TBT-Agreement of the WTO increased the visibility and economic salience of IEC standards. Building on increased informal engagement with many developing countries during the 1980s, the IEC started to encourage electro-technical organizations in many developing countries to seek membership or associate status. Since 1991, the IEC has thus attracted not just several newly independent countries as members but also a number of relatively poor, developing countries. In fact, if associate members are included, members from developing countries now outnumber members from advanced industrialized countries, though the latter still send the overwhelming majority of the technical experts that carry out the technical work, as evidenced by the number of the Technical Committees in which representatives from each country actively participate (committee-level “P-membership”; see final columns of Figure 7). The IEC's membership drive in recent years has been part of a conscious effort to broaden the basis of legitimacy of the organization as a transnational private regulator. One reason for the IEC to change its approach in the 1990s was that the end of Cold War diminished the incentive of unreflected deference to the politically/militarily and technologically leading countries. This created an incentive to broaden the basis of the IEC's legitimacy beyond the expertise of the specialists who come together in its technical committees. A second, potent reason was economic globalization. As the decline in tariffs and transport costs brought ever greater international integration of product markets, more and more countries recognized that technical standards controlled the access of their manufacturing industries to foreign markets. For electrotechnical products, those standards were increasingly IEC standards, partly due to international efforts to reduce the trade-inhibiting effects of differing national standards. Seeking assured access, international competitiveness, and sometimes economies of scale, developing countries increasingly adopted them as national standards, resulting sometimes in resistance against these standards as “foreign.”140 Bringing more countries into the IEC and giving their electrotechnical experts voice and vote allowed the IEC to increase its procedural (“input”) legitimacy as a global rule-maker. Third, the increasingly variable institutionalization of international cooperation, including the establishment of numerous preferential trade agreements with provisions concerning regulatory issues, threatened the centrality of the IEC.141 Giving a large number of developing countries a stake in the IEC membership throughout the Cold War, although a review of the minutes of technical committee meetings shows that the active participation of non-USSR technical experts notably declined when the USSR tightened its control over Eastern European countries in the 1950s. 140 E.g., WTO 2005. 141 See, e.g., the discussion of activities under NAFTA and CANENA in Hartlein et al 1997, 20.
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was a promising—and readily available—strategy to ensure that even new international institutions exclusively among developing countries would not challenge the preeminence of the IEC in global electro-technological governance. An important step in this direction was taken in 2001, when the IEC turned its policy of encouraging developing countries to join the organization through informal “pre-associated” status into an official “Affiliate Program,” in which 81 countries now participate. Affiliate membership allows non-voting participation in exchange for having to pay no membership fees at all (unlike in the earlier “pre-associated” status), while still being allowed to adopt IEC standards verbatim as national standards and sell up to two hundred of the resulting “national” standards documents to generate income for the national standards body.142 The Program has been vastly successful in increasing the number of countries that have a formal institutional link with the IEC (the program started with some thirty Affiliates in 2001; six current Associate Members started their relationship with the IEC as Affiliates.)143 To become an Affiliate, a country does not have to have already established institutions for electro-technical standard-setting at the domestic level. Rather the IEC encourages and helps Affiliates to develop such institutions—with private-sector participation if not altogether as a non-governmental organization—and then encourages them to prepare for, and eventually move to, associate or full membership. The program thus ensures that engineering associations and some firms (and often governments as well) in a large number of countries see themselves as deriving benefits from the IEC's position as the private regulator for electro-technology in the global economy.
142
Adopting an IEC standard as a national standard allows national member bodies to raise funds through the sale of these documents. Anyone can also buy IEC standards documents directly from the IEC, for which these sales are an important source of independent revenue, so the IEC incurred a real cost in making this change. 143 As of 1 October 2010, there are IEC Affiliates in Afghanistan, Angola, Antigua and Barbuda, Armenia, Bangladesh, Barbados, Belize, Benin, Bhutan, Bolivia, Botswana, Brunei Darussalam, Burkina Faso, Burundi, Cambodia, Cameroon, Central African Republic, Chad, Comoros, Congo (Brazzaville), Democratic Republic of Congo, Costa Rica, Cote D'Ivoire, Dominica, Dominican Republic, Ecuador, El Salvador, Eritrea, Ethiopia, Fiji, Gabon, Gambia, Ghana, Grenada, Guatemala, Guinea, Guinea Bissau, Guyana, Haiti, Honduras, Jamaica, Kyrgyzstan, Laos, Lebanon, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mauritius, Moldova, Mongolia, Mozambique, Myanmar, Namibia, Nepal, Niger, Palestine, Panama, Papua New Guinea, Paraguay, Peru, Rwanda, Saint Lucia, Saint Vincent and the Grenadines, Senegal, Seychelles, Sierra Leone, Sudan, Suriname, Swaziland, Tanzania, Togo, Trinidad and Tobago, Turkmenistan, Uganda, Uruguay, Venezuela, Yemen, Zambia, and Zimbabwe. For additional information, see http://www.iec.ch/affiliates/acp_about-e.htm (last accessed 10/1/2010).
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Business and Politics, Vol. 12 [2010], Iss. 3, Art. 4 Full Members Algeria Argentina Australia Austria Belarus Belgium Brazil Bulgaria Canada Chile China Croatia Czech Rep Denmark Egypt Finland France Germany Greece Hungary India Indonesia Iran Iraq Ireland Israel Italy Japan Korea (S) Libya Luxembourg Malaysia Mexico Netherlands New Zealand Norway Oman Pakistan Philippines Poland Portugal Qatar Romania Russia Saudi Arabia Serbia Singapore Slovakia Slovenia South Africa Spain Sweden Switzerland Thailand Turkey Ukraine U.A.E. UK USA
Associate Members Albania Bahrain Bosnia Colombia Cuba Cyprus Estonia Georgia Iceland Jordan Kazakhstan Kenya Korea (N) Latvia Lithuania Malta Montenegro Morocco Nigeria Sri Lanka FYRMacedonia Tunisia Vietnam
19061910
1911- 19211920 1930
1931- 19411940 1950
1951- 1961- 19711960 1970 1980
19811990 91 92 93
20 94 95 96 97 98 99 00 01 02
P-mem O-mem berships berships 03
04 05 06
07 08
09
10 2 0 6 10 80 60 108 54 2 26 101 67 48 55 6 142 93 23 0 0 173 1 8 59 83 87 119 51 38 8 135 37 158 16 170 1 11 95 43 97 72 82 17 49 2 37 0 0 25 88 31 58 163 11 171 2 140 31 0 0 1 2 21 74 50 57 120 35 33 85 85 76 0 0 66 0 0 0 72 99 71 52 0 1 10 55 148 19 13 1 49 102 8 87 9 89 21 71 69 49 13 37 13 35 26 52 9 89 26 59 28 129 0 0 168 5 157 0 P-mem O-mem berships berships
(1913) (1927) (1910) (1909) (1952) (1958) (1908) (1936)
(1908) (1930) (1949) (1907) (1907) (1930) (1949) (1929) (1954) (1966) (1974) (1951) (1907) (1910) (1964)
(1990) (1980) (1910) (1979) (1912) (1959) (suspended) (1923) (1929) (1927) (1911) (1936) (1990)
(1939) (1907) (1907) (1911) (1955) (1956)
(1906) (1907) 19061910
1911- 19211920 1930
1931- 19411940 1950
1951- 1961- 19711960 1970 1980
19811990 91 92 93
(1969)
20 94 95 96 97 98 99 00 01 02 03 (Affiliate)
04 05 06
07 08
09
(Pre-Associate/Affiliate)
(Affiliate) (Affiliate) (Affiliate) (1963)
(Affiliate) (Affiliate) (1985)
10 2 0 0 4 4 2 0 0 1 3 4 4 0 0 0 4 0 0 3 3 1 4 0
0 0 2 1 0 0 0 0 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0
Figure 7 IEC Membership (Full and Associate Members), 1906-2010 Note: Bosnia = Bosnia & Herzegovina; Cuba was a full member 1969-1980; Czech and Slovak membership was preceded by Czechoslovakian membership 1921-1939 and 1956-1992; FYRMacedonia = Former Yugoslav Republic of Macedonia; North Korean membership suspended in 2010. Russia/USSR/Russia is treated as one continuous membership; Serbia continues the membership of Yugoslavia (2003-2006 as Serbia & Montenegro); Thailand was a full member for one year in 1955. Years in parentheses indicate first year of membership where ambiguous. Final 2 columns indicate number of Technical Committees in which the country's member body holds memberships as of 10/1/2010; P: participant; O: observer.
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4.7 Establishing and Maintaining Preeminence: Relations with Other Organizations Notwithstanding the high technical quality of its standards, the IEC's preeminence as the focal point of private electro-technical regulation is not an incidental byproduct of the success of its standards in the marketplace. The IEC has consciously pursued preeminence, helped by the fact that the current high commercial stakes only arose after the IEC had already become the focal point for transnational standard-setting. There are numerous indications that the IEC actively sought this position. As early as the 1920s, the IEC started to develop informal as well as formal links with other public and private organizations engaged in technical standardization. It helped bring together many of these organizations in meetings of experts, such as the International Conference on Large Electric Systems of 1921 or the World Power Conference of 1924.144 Although too few documents have survived from that period to assess the extent to which the IEC acted strategically in these early years, it speaks to the IEC's savvy in acting in its organizational interest, that it has outlasted almost all of the other inter- and transnational organizations with which it cooperated in the interwar period.145 When the IEC was revived after World War II, its officers moved swiftly to safeguard the IEC's organizational independence, rejecting proposal to make it a sub-organization (or subset of committees) of the newly founded International Organization for Standardization (ISO).146 At the same time, they established a close (if not always frictionless) working relationship with the ISO, facilitated by the fact that the ISO modeled its standard-setting procedures after the IEC's (now governed by joint documents).147 To deal with issues where the organizations' purview clearly overlapped, they formed a joint technical committee (JTC1, which, today, has several dozen subcommittees). The international standards that specify the dimensions, placement of the magnetic strip, and other features of
144
Ainsworth 1964; Mechanical Engineering Staff Writers 1924; N.N. 1921; Ruppert, (1956), 5; Sillcox (1954), 254. 145 Some of the inter- and transnational meetings organized or assisted by the IEC led to the formation of new transnational organizations, of which a few exist to this day. CIGRÉ (http://www.cigre.org/), for instance, traces its origin to the 1921 International Conference on Large Electrical System; the World Energy Council (www.worldenergy.org) is the successor to the organization that arose from the 1924 World Power Conference. None of them, however, set electro-technical standards. 146 The IEC thus avoided, at the international level, the institutional restructuring that in many countries effectively brought electro-technical standardization under the umbrella of a single national standards body, such as in the UK under the British Standards Institution. 147 Maréchal 1997.
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bank and credit cards—greatly facilitating financial transactions for international travelers—are examples of the work of ISO /IEC JTC1.148 IEC-ISO cooperation has been complemented by the establishment of consultative or cooperative relationships with international organizations such as the International Telecommunications Union and in more recent years also the World Health Organization and the World Trade Organization (WTO), as well as regional electro-technical standard-setters, in particular the European CENELEC with which the IEC entered into the formal “Dresden” cooperation agreement in 1996.149 In addition, the IEC recognizes several international (governmental) and a large number of transnational (non-governmental) organizations as legitimate representatives of international, trans-governmental, or transnational stakeholders for the activities of specific IEC technical committees.150 These institutional links, which are officially established to “encourag[e] implementation of [the IEC's] international standards”151 bestow upon the IEC the additional legitimacy that comes from the explicit recognition of IEC standard-setting as exemplary and central. At the same time, by giving groups such as Consumers International, the International Amateur Radio Union, the International Institute of Welding, and the World Federation for Ultrasound in Medicine and Biology voice opportunities in IEC rule-making, the IEC also ensures that significant portions of global civil society have a stake in the continued centrality of the IEC. Some of these arrangements even have led to an explicit delegation of regulatory authority to the IEC. Most important in this respect has been the TBTAgreement, which came into force on 1 January 1995 as an integral part of the treaty establishing the WTO. In this treaty, all member states committed themselves to use international standards as the technical basis for laws and regulations whenever international standards exist and can achieve the legitimate objectives of such laws and regulations, such as health, safety, or consumer protection.152 Annex 3 of the Agreement contains a “Code of Good Practice for the Preparation, Adoption and Application of Standards,” which is based on principles long agreed between IEC and ISO and obliges standard-setting organizations at any level to notify the joint ISO/IEC Information Center of their acceptance of (or withdrawal from) the Code. Further adding to the IEC's centrality, the agreement stipulates that standard-setting organizations at the national/local and regional level must notify IEC and ISO at least once every six months of any standards they are currently developing. The Agreement merely defines “international” standards contextually as standards “issued by 148
The key standards here are ISO/IEC 7810 and ISO/IEC 7813, supplemented by several others. See, e.g., Egan 2001 and IEC 2010c. 150 IEC 2010d. 151 IEC 2010c. 152 TBT-Agreement, Articles 2.2 and 2.4. 149
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international standardizing bodies,”153 and it defines an “international body” as “open to the relevant bodies of at least all Members” of the WTO,154 but IEC and ISO are the only standard-developing organizations explicitly recognized in the text of the TBT-Agreement as a source of such standards.155 WTO member states have thus delegated significant regulatory authority to the IEC and cemented the central position of the IEC as the focal point for private regulation of electrotechnology.156 5. Conclusion This article has sought to explain how one transnational organization, the International Electrotechnical Commission (IEC), has over the course of the last century become the private regulator for a substantial part of the global economy. Created in 1906 to define basic units and standardize symbols and methods of measurement for the emergent field of electro-technology, the IEC has developed and now maintains thousands of technical rules for electrical and electronic components of a vast array of industrial and consumer products. Such product standards have important consequences, including distributional implications, for firms, consumers, and national economies. As Donald Lecraw summarized it in “Some Economic Effects of Standards:” Standards affect product quality, availability, variety, and price [as well as] the technical, dynamic, and allocational efficiency of the economy. They affect international trade, and the distribution of production…, the distribution of consumption…, and distribution of income among producers and consumers. Standards are capable of creating or correcting market failure through their effects on the economic power of different economic agents…; the amount, quality, and cost of information available to users; and on the perceived and actual risk of product use. … Standards can also be used to build barriers to entry [and] to create, increase or entrench market power.157 153
TBT-Agreement, Articles 5.4 and 12.6. TBT-Agreement, Annex I.4. 155 Negotiation documents also show a consensus that ITU standards would be considered international standards. Annex 1 of the Agreement defers to the ISO/IEC definitions of terms for "standardization and related activities." 156 See also Marceau and Trachtman 2002. Unlike the delegation to international standardsdeveloping organizations in the WTO's SPS-Agreement (see Büthe 2008), this legal recognition is non-exclusive, but safeguards the IEC against the controversies encountered by some other (mostly U.S.-based) SDOs that have sought to be considered international standard-setters under the terms of the TBT-Agreement but are not recognized as such by most countries. 157 Lecraw 1984, 507, 509. See also sections 2 and 4.5. 154
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And in the realm of electrical and electronic products and components, as a senior standards manager for General Electric summed it up in an interview with the magazine of the U.S. National Electrical Equipment Manufacturers Association (NEMA) in 2001: “IEC standards are preeminent.”158 I have sought to trace and explain how, over the course of the century since it was created in 1906, the private (transnational) IEC has become the clear institutional focal point for developing global rules for electro-technology, with important consequences for the politics of rule-making for global product markets. Beyond providing an empirical analysis of the institutional development of a particular global private regulator, I have sought to develop a set of general theoretical propositions. Recognizing that there may be several ways in which a regulatory body might achieve preeminence (multiple causal pathways) and that the specific actions taken by the regulator or its stakeholders may be highly contingent, I have focused on deductively identifying three conditions that make it more likely that a single rule-making institution will become preeminent in its area of expertise, i.e., the essentially uncontested focal point for setting the pertinent standards for global markets. I have emphasized, first, agency, that is, the ability of the regulatory body's leaders to pursue its organizational selfinterest. Second and partly as a consequence, I have emphasized the sequence of institutional development and the evolution of political-economic stakes. If the distributional stakes are high at the moment of institutional design, discretion and hence agency for the regulator is likely to be low. And if the stakes are high before a single regulator has clearly established itself as the focal point, then protracted competition among multiple regulators is likely. Finally, I emphasized timing and duration of the initial institutional arrangement. Although being the first private regulator in a given issue area is by no means required to attain preeminence, it provides numerous opportunities foreclosed to late arrivals or to private regulators that co-exist with competitors from the start. Key elements of the history of the IEC from 1906 to 2010 provide strong support for the argument. The empirical analysis shows that organizational agency, timing, and sequence indeed played a major part in the institutional development of the IEC, including its ability to become the preeminent transnational private regulator for electro-technology. While a comparative analysis of other transnational bodies that have become the clear focal point for drawing up rules for the global economy is beyond the scope of this paper, existing analyses of the International Organization for Standardization, for instance, suggest that the same factors have driven the institutional development
158
Interview with Ed Yandek, manager of worldwide industry standards for General Electric Lighting, (Electroindustry Magazine 2001). The statement is all the more remarkable since U.S. interests often do not succeed in IEC standardization.
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of that institution.159 A similar dynamic can even be observed at the domestic level: Organizational (publisher) self-interest and sequence play a crucial role in Wendy Espeland and Michael Sauder's account of how U.S. News and World Report became the preeminent standard-setter for law school rankings, affecting faculty hiring, teaching assignments, and resource allocation in law schools throughout the country.160 Finally, note one broader implication of the theoretical discussion and the empirical findings. The crucial importance of a private regulator's ability to pursue preeminence actively, discussed in greater detail in section 3.1 and in passing in section 4 suggests that institutional analysis needs to focus not just on institutions as structures (within which socio-political actors interact), but more systematically on institutions as (potential) actors. References Adams, Walter, and James W. Brock. 1982. “Integrated Monopoly and Market Power: System Selling, Compatibility Standards, and Market Control.“ Quarterly Review of Economics and Business 22 (4): 29-42. Abbott, Andrew. 1988. The System of Professions: An Essay on the Division of Expert Labor. Chicago: University of Chicago Press. Adolphi, Hendrik, and Jens Kleinemeyer. 1998. “International Standardization: History and Organizations.“ In An Introduction to Standards and Standardization, edited by Wilfried Hesser and Alex Inklaar. Berlin: Beuth Verlag, 252-281. Ahearn, Raymond J. 2008. Transatlantic Regulatory Cooperation: Background and Analysis (CRS Report for Congress). Washington: Congressional Research Service. Ainsworth, Cyril. 1964. “Standardization Abroad.“ Magazine of Standards 35 (12): 364-367. ANSI (American National Standards Institute). 2010. Overview of the U.S. Standardization System. 3rd edition. Washington: ANSI. Appleyard, Rollo. 1939. The History of the Institutions of Electrical Engineers, 1871-1931. London: IEE. 159
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Article 5
PRIVATE REGULATION IN THE GLOBAL ECONOMY
The Causes and Consequences of Private Food Governance Doris Fuchs, University of Münster Agni Kalfagianni, Vrije University of Amsterdam
Recommended Citation: Fuchs, Doris and Kalfagianni, Agni (2010) "The Causes and Consequences of Private Food Governance," Business and Politics: Vol. 12 : Iss. 3, Article 5. Available at: http://www.bepress.com/bap/vol12/iss3/art5 DOI: 10.2202/1469-3569.1319 ©2010 Berkeley Electronic Press. All rights reserved.
The Causes and Consequences of Private Food Governance Doris Fuchs and Agni Kalfagianni
Abstract This paper investigates the creation and consequences of private regulation in global food governance. It points to the power to govern and the authority to govern as the two crucial conditions for the emergence and diffusion of private food regulation. More specifically, the paper argues that the power to govern is a function of the structural power of agrifood corporations, particularly retail food corporations in our case. The authority to govern is a function of the perceived legitimacy of retail food corporations as political actors. By linking power and authority to the material and ideational structures existing in the global political economy of food, this paper analyses the processes that serve to create, maintain and reproduce private regulation in food governance. With its analysis, the paper aims to contribute to the theoretical and empirical debates on private authority, private regulation and the challenges for sustainability in the global food system. KEYWORDS: private governance, regulation Author Notes: Doris Fuchs is Professor of Political Science at the Westphalian Wilhelms University, Münster, Germany; she can be reached via email at:
[email protected]. Agni Kalfagianni is Assistant Professor at the Institute for Environmental Studies (IVM), Vrije University of Amsterdam; she can be reached via email at:
[email protected]. The authors thank Tim Büthe, Joonkoo Lee, Fritz Mayer, and three anonymous reviewers for Business and Politics for comments on previous drafts.
Fuchs and Kalfagianni: The Causes and Consequences of Private Food Governance
1. Introduction This paper investigates the creation of private regulation of agricultural production, processing, trade and retail sale of food in the global economy and discusses their implications. In this endeavor, it points to the power to govern and the authority to govern as the two crucial conditions for the emergence and diffusion of private food regulation. Cutler, Haufler and Porter1 define authority as “decision-making power over an issue area that is generally regarded as legitimate by participants.” Accordingly, we consider legitimacy a constitutive element of private authority in food governance, next to the enabling role of the structural power of agrifood corporations, which allowed the imposition of their rules on others. Indeed, scholars observe that non-state actors, specifically big retail corporations, have increasingly come to be perceived as legitimate political actors in global food politics, particularly in the context of the creation and implementation of private norms, rules and standards.2 Global food and agriculture governance faces tremendous challenges at the dawn of the new millennium. Food insecurity, i.e., the inability to access sufficient amounts of safe and nutritious food, remains a core concern for hundreds of millions of people while hunger and poverty are expanding at alarming rates on a global scale. Soaring food prices and the global economic downturn put additional pressure on already vulnerable populations and marginal groups. At the same time, global environmental challenges, in particular climate change, as well as pollution and water shortages, are expected to multiply threats to the provision of adequate amounts of nutritious and safe food. Moreover, environmental problems are exacerbated by a complex array of factors, including resource intensive dietetic shifts in some emerging economies, notably China, less availability of land due to biofuel plantations, loss of agricultural productivity due to soil degradation, and increasing competition for the use of natural resources. Accordingly, we focus on the sustainability of the global agrifood system, especially environmental conditions and food security, in our analyses of the consequences of private food governance. This paper proceeds in two steps. In the first part of the paper, we discuss the manifestations of private regulation in food retailing and their consequences for the sustainability challenges identified above. We review and add to previous research showing that the rise of food retail governance has serious consequences for two fundamental attributes of global food governance, namely environmental sustainability and food security. Clearly, the environmental impacts of food supply chains are numerous and cover all stages from the production of raw materials to processing, distribution and sale. Yet, environmental norms, for 1 2
Cutler, Haufler and Porter 1999, 362. Burch and Lawrence 2007; Clapp and Fuchs 2009.
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instance, tend to play a marginal role in private retail governance and address a few select issues only. Retail governance also affects food security, and, it has had a limited positive impact on food safety. Thus, it has resulted in improved choice for some consumers, as we show below. These benefits, however, tend to accrue only to a small segment of the global population. Simultaneously, retailers also restructure local markets and social networks, particularly in the South, imposing major difficulties on small farmers, and amplifying their food insecurity. In the second part of the paper, we discuss the causes and facilitating conditions of the emergence of private regulation in global food retailing. Specifically, the paper highlights the role of material and ideational structures in enabling and constraining actors and their access to legitimacy sources. The paper argues that the structural power of agrifood corporations and the supportive setting of public policies that fostered trade liberalization and capital mobility enabled the development and exercise of private regulation. Moreover, we delineate the ways in which neoliberalism and globalization discourses as well as access to and control over financial and technological networks facilitated the attribution of political legitimacy to these economic actors on the basis of expertise, a focus on efficiency values, trust in technology, and the notion of appropriate delegation.3 Furthermore, the paper points out how food retail corporations are strategically shaping and strengthening their perceived legitimacy as political actors by re-making images and identities, using and framing discourses and instrumentalizing public authority.4 With its analysis, the paper aims to contribute to the theoretical and empirical debate on private authority, private regulation and the challenges for sustainability in the global food system. Empirically, the paper makes a timely contribution particularly due to widespread concerns about food safety, availability of food supply and, increasingly, the environmental well-being of the food system. Likewise, private food retail standards present an excellent example of private authority as these de jure voluntary private standards have become de facto compulsory,5 as actors who fail to comply lose their “license” to participate in the global market.6 Given that non-elected actors thus design and enforce quasi compulsory rules and norms, the foundations of their authority deserve attention. The paper also contributes to critical analyses of private authority by explaining the mechanisms of private authority creation on the basis of power structures. The concluding section therefore delineates the implications of our findings for politics and social science. 3
Bernstein and Cashore 2007; Hansen and Salskov-Iversen 2007; Porter 2005; Thirkell-White 2006. 4 Fuchs 2005; Harten 2005. 5 Blowfied 2005. 6 Busch 2000; Calfaggi and Janczuk 2010; Fulponi 2006; Havinga 2006; Mattli and Büthe 2003. http://www.bepress.com/bap/vol12/iss3/art5 DOI: 10.2202/1469-3569.1319
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2. Manifestations and Consequences of Private Regulation on Global Food Governance This section presents the manifestations of private retail regulation and its consequences for two major challenges facing the global food system today, namely environmental well-being and food security. Traditionally the concern of governments and international organizations, these two aspects of sustainability now represent a flourishing terrain for retail corporations’ governance activities, particularly in the form of private standards and corporate social responsibility initiatives. On the basis of such standards and initiatives, retailers are able to regulate the human impact on the food system in general, and environmental wellbeing and food security in particular. The analysis that follows serves two goals. First, we need to know whether private initiative is fostering improvements in the sustainability of the food system or worsening an already bad situation. Second, such an analysis provides the impetus for inquiring about the rise of retail authority, the subject of the next section. 2.1 Environmental Well-being All stages of the human food supply chains, from food production to processing, packaging, distribution and sale, leave an impact on the environment. Waste, water pollution, energy inefficiencies, pesticide use and the decline of biodiversity constitute typical environmental concerns associated with food chain processes. Crucially, the governance of environmentally harmful side-effects of food production is a rapidly emerging issue for retailers.7 Retail governance of these environmental issues takes place in three distinct ways: prescription and/or adoption of (a) good agricultural practices and/or promotion of organic products, (b) specific “good manufacturing” practices, and (c) general energy efficiency initiatives. Examples of such governance schemes and their impacts on the wellbeing of the food system are discussed below. Good Agricultural Practices (GAP) are standards prescribing farming practices that aim to concretely contribute to environmental, economic and social sustainability of on-farm production, resulting in safe and healthy food and nonfood agricultural products.8 Retailers' environmental standards concerning GAP practices require, for instance, the sparing use of water, pesticide use and antibiotics, or prescribe energy conservation as well as wildlife and landscape conservation and enhancement. Retailers develop such standards either individually or collectively. Examples of prominent environmental GAP 7 8
Lang and Barling 2007. FAO 2003.
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standards developed by individual retailers include Tesco’s Nature’s Choice Scheme and Carrefour’s Quality Line Products. At the global level, the Global Partnership for Good Agricultural Practice (GlobalGap), a private sector body that sets voluntary standards for the certification of agricultural products around the globe, is the chief example of collective GAP standards.9 Retail chains are also entering organic retailing. Organic production standards are more stringent than GAP standards and include the forbiddance of conventional pesticides, artificial fertilizers, GMOs, ionizing radiation and food additives, or antibiotics and growth hormones for animals. Beyond these requirements for organic products, retailers often demand that suppliers meet additional stipulations, in particular concerning size and color. Organic fruits and vegetables, for instance, ought to resemble conventional products as much as possible.10 Currently, most organic sales in the EU and abroad are made through conventional retailers.11 Beyond the agricultural sector, some retail standards also focus on the environmental impact of manufacturing processes and packaging; they are part of Good Manufacturing Practices (GMP).12 These practices include, for example, recycling programs for waste reduction in packaging. Many supermarkets have recycling programs in situ, where consumers can return plastic bottles, glass, cans, paper packages, small electronic equipment, mobile phones and batteries. Some supermarkets implement environmental management systems to minimize waste and perform life-cycle analyses to define their policies on check-out bags and advertising catalogues (e.g., Carrefour). Moreover, many supermarkets operate under ISO 14000-series standards. Finally, given the increasing attention to concerns about climate change at the global and (certain) national levels, some leading retailers have started to adopt energy efficiency initiatives. Similar to GAP practices, some of these initiatives are developed by individual retailers, whereas others constitute collective efforts. Examples of individual initiatives include global retail leaders’ initiatives, such as Wal-Mart’s sustainability index label, which communicates the 9
GlobalGAP (first known as EurepGAP) was initiated in 1997 by retailers belonging to the EuroRetailer Produce Working Group (EUREP). The driving forces were British retailers in conjunction with supermarkets in continental Europe, who wanted to harmonize their own standards on product safety, as well as environmental well-being and labor welfare. As the standard began to gain global significance it was rebranded to GlobalGAP at the 8th global conference in Bangkok in September 2007. 10 Lyons 2007. 11 In Sweden, around 90 percent of all organic food is sold through conventional retail outlets, while the figure for the UK is 80 percent (Lyons 2007). Outside the EU, China reports most organic sales through conventional supermarkets, while in the US the figure is nearly 50 percent (Lyons 2007). 12 OECD 2006. http://www.bepress.com/bap/vol12/iss3/art5 DOI: 10.2202/1469-3569.1319
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CO2 emissions as well as other environmental consequences (e.g., water usage and air pollution) of various products sold at Wal-Mart, starting October 2009. Top European retailers, such as Carrefour and Tesco, have also adopted CO2 reporting schemes. Instead of focusing on some individual products, however, their reports cover their entire operations. Collective initiatives to regulate energy efficiency can be found at the EU level. Specifically, EuroCommerce and the European Retail Round Table (a consortium of retailers with a customer base of 250 million people), which represent the European retail sector, pledged to improve energy efficiency by 20 percent by 2020 (compared to 2004 levels).13 In that context, a Retail Forum and a Retailers’ Environmental Action Plan (REAP) were launched, setting voluntary targets to reduce energy consumption of the retailers themselves as well as the ecological footprint of their supply chains.14 What is the impact of such initiatives? Even though the environmental auditing of retail operations is currently incomplete and covers only specific products or practices rather than the sector as a whole,15 some conclusions can be drawn. Specifically, individual best practice projects concern only a small part of total production and thus their impact on the overall environmental characteristics of the global food system is minimal.16 Tesco’s Nature Choice scheme, for instance, covers about 12,000 out of the 300,000 suppliers that exist in the UK. GlobalGap, which is currently implemented in more than 100 countries and covers 94,000 suppliers worldwide with growing membership every year, has a larger potential impact. In that case, however, many environmental conservation practices are only recommendations, and supplier non-compliance does not always prevent certification.17 The potential of GlobalGap is further weakened by the declining emphasis on sustainability within the GlobalGap initiative from its launch in 1997 until today.18 Endorsement of organic standards by retailers has increased the availability of organic food for many consumers and has increased market and 13
According to Sustainable Energy and Environment Design 2008, Carrefour and Tesco participate in this initiative. 14 Both initiatives were developed in response to the Communication from the Commission on Sustainable Consumption and Production calling for ambitious and stringent retail standards and labels with the aim to boost energy efficiency, support eco-innovation and enhance the environmental potential of the industry. 15 Lang and Barling 2007. 16 Fuchs et al 2009. Mayer and Gereffi (2010) argue that private governance is only able to contribute to the provision of public goods under certain conditions and come to a similarly critical evaluation of the effects of private governance. 17 For a discussion of the challenges related to implementation of private governance schemes, see Bartley 2010. 18 Van der Grijp 2008. Published by Berkeley Electronic Press, 2010
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financial security for some organic producers.19 The net environmental benefits of organizing organic production under global supply chains have yet to be established, however. Such practices also foster the weakening of the organic movement’s second-order principles, such as sourcing from local networks and privileging small suppliers. The latter are especially vulnerable, as the retailer's additional requirements for color and size of organic products can mostly be afforded by big producers. Regarding the energy efficiency initiatives, it is too early to evaluate their impact. Collective pledges by European retailers to reduce greenhouse gas (GHG) emissions have real potential since retailers are the main drivers of energy inefficiency in the EU food sector, though the target may not be sufficiently ambitious to achieve meaningful GHG reductions.20 Moreover, compliance with these standards is expected to be high, not least due to the supervisory role adopted by the Commission and its “threat” to introduce its own stringent standards. Compliance is another matter for individual (non-EU) initiatives. Thus, reporting in Wal-Mart’s sustainability index is voluntary and non-compliance does not carry any consequences for the suppliers.21 Likewise, critical analyses have suggested that the ISO 14000-series standards lack stringency (i.e. they do not set clear, measurable and ambitious targets) and limit the requirements to measuring and reporting, so that little improvement in actual conduct should be expected from them.22 In general, the question remains whether retail environmental standards are stringent and comprehensive enough to allow the reaping of significant environmental benefits. At the moment, the evidence is inconclusive. We therefore caution against too easily attributing effectiveness to private environmental regulation by retailers.23 2.2 Food Security According to the Rome Declaration on World Food Security, food security exists “when all people, at all times, have access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life.”24 Today, food insecurity remains a problem for millions of people while its range and consequences have been aggravated by the recent food crisis. FAO estimates that world hunger is increasing, with the number of hungry people reaching more 19
Lyons 2007. Lang and Barling 2007. 21 Rosenbloom 2009. 22 Clapp 2004. cf. Prakash and Potoski 2006. 23 See also Fuchs et al 2009; Mayer and Gereffi 2010. 24 FAO 1996. 20
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than one billion in 2009.25 Sub-Saharan Africa, Asia and the Pacific had the largest increases in the number of undernourished people in the last years, while poor, landless and female-headed households were particularly affected.26 Food insecurity has also increased in the western world, however. In the US, hunger has been a persistent cause of concern for decades. In the 1990s, it was estimated that 11 million people lived in households that were “food insecure” and a further 23 million lived in risk of hunger.27 Likewise, food insecurity is also observed in the EU. According to the European Nutrition for Health Alliance (ENHA), more than 50 million Europeans, particularly low income populations and the elderly, are malnourished.28 How do retailers' private standards affect food security, and which dimensions of food security do they influence? The development of own-brand products and investments in auditing techniques for different aspects of food quality29 have had a positive impact on several aspects of food security at first sight. Thus, many products have become cheaper, while diversity has increased, allowing more people to satisfy a variety of preferences. Organic food, fair trade, kosher30 (religious), food for diabetics (health concerns), functional foods and beverages exist in abundance on supermarket shelves. Moreover, attention to food safety risks, particularly from microbiological hazards, has improved via the establishment of traceability schemes and food safety standards (e.g., HACCP),31 even though larger epidemic outbreaks have not always been managed well. Prominent retail standards with a major focus on food safety include the Global Food Safety Initiative (GFSI), British Retail Consortium Global Standard for Food Safety (BRC), International Food Standards (IFS), Safe Quality Food (SQF) and GlobalGap.32 Critics point out, however, that only affluent consumers have significant food choice, while middle-income consumers have rather less and the poor next to none.33 In this vein, the benefits of the private regulations discussed above accrue to a small segment of the global population, particularly consumers in the Western world and the emerging consumer class of fast-developing countries, in particular China.34 As we explain in more detail in the next section, this is a
25
FAO 2009. FAO 2008. 27 Lang and Heasman 2004, 95. 28 Halliday 2006. 29 Auld et al. 2010. Campbell and Le Heron 2007. 30 See also Starobin and Weinthal 2010. 31 HACCP stands for Hazard Analysis and Critical Control Points. 32 For an extended analysis of these standards see Fuchs et al 2011. 33 Lang and Heasman 2004, 194. 34 See also Fuchs et al 2009. 26
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crucial observation as retail authority largely depends on such selected “elite” groups. Finally, large retail chains also impact food security in indirect ways. Many observers view especially the proliferation of private certification schemes (including those identified in the previous section), as pushing small farmers out of the market in favor of large agribusinesses and food processors due to the high costs of implementation.35 According to critical observers, thousands of farmers in Africa, for instance, have lost their “license to produce” as a result of GlobalGap certifications.36 While pressure on rural incomes in developing countries already existed because of asymmetric trade liberalization,37 the negative impact has been reinforced by the spread of private food retail standards.38 Here, too, poor, landless and female-headed households are the hardest hit.39 These developments contribute to the ongoing rural exodus, which is already a strong trend in countries with long-term economic maldevelopment.40 Rural dwellers currently represent 60 per cent of the population of developing countries. That share is expected to drop to 44 per cent by 2030 with profound social, economic and environmental repercussions.41 While it would be an exaggeration to claim that the demands put on developing countries' farmers by global food retailers are the only cause, they are an important additional driver. Migration to nearby medium and large cities does not necessarily signal a country’s economic development and improvements in living standards. Rather, the fastest-growing parts of large cities are often their slums.42 The already vulnerable members of the population then, become even more vulnerable, when they are forced to migrate to an urban environment due to shrinking opportunities to earn a living as small farmers.43 To sum up, retailers have an impact on the environmental consequences of the food system and on food security via the development of private standards and initiatives. The global net benefit, however, is at best ambiguous at the moment. Evidence of broad-based environmental improvements as a result of retail governance is currently lacking, while examples of best practices are too few at 35
FAO 2006a; Hatanaka et al 2005. ActionAid 2005. 37 McMichael 2004. 38 While these standards are flexible with respect to environmental objectives, they are very stringent regarding “quality” attributes such as size, shape and color, and include strict hygiene and safety requirements. 39 FAO 2008. 40 See also Fuchs and Kalfagianni 2009. 41 FAO 2006b. 42 Davis 2006. 43 See also Mingione and Pugliese 1994. 36
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present and have too little coverage to be confident that private regulation makes a difference. The impact of private regulation on food security is even more problematic. While some benefits in terms of food safety and diversity can be observed, these accrue disproportionately to a small segment of the global population. In contrast, the majority of the global poor (also representing the majority of global population) gain little—and many may lose—from retail authority in global food governance. 3. The Causes of Private Regulation in Global Food Governance The previous section established the significance of private regulation in food governance. Here, we inquire into the causes of its emergence and diffusion. We argue that the emergence and diffusion of private food regulation is a function of two pivotal characteristics of the global political economy of food. It is a function of the structural power of agrifood corporations, specifically retail food corporations in our case, providing them with the power to govern. It is also a function of the perceived legitimacy of retail food corporations as political actors, which grants them the authority to govern. In fact, the aspect of authority is what is particularly noteworthy about the emergence and diffusion of private regulation. In a seminal work that sparked the debate on private authority, Cutler, Haufler and Porter observed that authority— “decision-making power over an issue area that is generally regarded as legitimate by participants” 44—is not necessarily constrained to the realm of the state. Instead, non-state and particularly market actors increasingly exercise authority. Such activities include, for instance, the regulation of finance and international accounting, internet and e-commerce governance, environmental governance, labor standards, and intellectual property rights.45 Central to the conceptualization of authority is the notion of legitimacy. Following Arendt, authority can be defined as legitimate force.46 Importantly, however, authority also works in the absence of force and, in fact, prevents the need to use force most of the time due to the normative buy-in caused by the perceived legitimacy of a given institution or actor. The aspect of legitimacy, then, is the pivotal difference between authority and power. Authoritative rules are accepted as such because they are considered “right” on the basis of moral convictions (i.e., conviction that it is the right thing to do) and/or custom (i.e., 44
Cutler, Haufler and Porter 1999, 362. For more recent analyses on manifestations of private authority in global governance see Fuchs 2005; Clapp and Fuchs 2009; Graz and Nölke 2008; Porter and Ronit 2010; Büthe and Mattli 2011. 46 Arendt 1970. 45
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because private rule setting has become an understandable and recognized practice) and shared beliefs.47 In turn, enforcement of the rules via force is considered legitimate as well. In the public arena of democratic societies, citizens accept public policies, i.e., governmentally decided rules, as legitimate because they participate directly or indirectly (through elected representatives) in the making of the rules. Put differently, those making the rules have the authority granted by their office, to which they have been elected. Moreover, the public can, through courts of law as well as elections, hold decision-makers accountable for their decisions. In the private sphere, rules lack that quality, however. As the introductory essay of this special issue notes, private rules are rarely, if ever, created with participation of all of the subjects of regulation, an observation that extends to global food governance.48 Accountability is generally lacking as well, while the absence of transparency in most cases makes it even harder for the regulated to have some control over private regulators.49 Where does private authority originate from, then? How are private rules legitimized? In this paper, we adopt a critical approach, emphasizing the role of ideational factors, in interplay with material structures, facilitating or constraining access to sources of legitimacy, and therefore providing legitimate power and creating authority. We will discuss the sources of private power to govern and private authority to govern below by linking the emergence of private food regulation to the material and ideational structures existing in the global political economy of food. Specifically, we will show that the power to govern results primarily from material structures, while the authority to govern primarily results from ideational structures, although material structures are invested with ideational meaning as well, of course. Importantly, power and authority, as well as ideational and material bases of private governance, play a complementary rather than contradictory role in our analysis. Even though power to govern and authority to govern do not always co-exist, they reinforce one another when operating simultaneously: Retail rule works because little choice is left to subjects but to obey; it remains unchallenged because it is perceived as legitimate.50 Before we proceed, an observation regarding the relationship between public and private food governance is in order. Private food governance has not developed completely independently from the activities of public actors. In fact, 47
Beetham 1991; Cashore 2002. Büthe 2010; see also Fuchs et al 2011. 49 Fuchs et al 2011; Harten 2005. 50 A relationship between power and authority also exists insofar as greater power can be a source of authority, if observers trust that powerful actors can achieve certain goals most effectively. It can also have the opposite effect, of course, as stakeholders may view the visibly powerful actors with suspicion. Still, it makes sense here to distinguish between power and authority for analytical purposes. 48
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public regulation has greatly facilitated the development of private regulation. In certain cases, public actors provide the basis for the creation of private authority by holding market actors accountable for any wrongdoing in the supply chain. Retail traceability standards, in particular, developed as a result of public regulation, specifically the General Food Law of the European Union (EU). More specifically, the EU General Food Law explicitly places responsibility on the private sector stating that food business operators should have “primary legal responsibility for ensuring food safety.”51 This regulation further demands that food business operators should “actively participate in implementing food law requirements by verifying that such requirements are met.”52 Here, the line between public and private food authority becomes somewhat ambiguous. In that context, it is noteworthy that by pushing responsibility onto private actors, public actors are also hiding from their own. Private authority, however, is more than a simple response to public demands. Global retail standards and initiatives, for instance, develop despite existing public ones, such as those specified by the Codex Alimentarius Commission.53 More specifically, the lobbying of private actors has prevented the development of more specific and far reaching standards as elements of the Codex Alimentarius.54 Indeed, scholars observe the highly politicized nature of standard setting in the Codex with the prevalence of economic and political interests in bargaining processes.55 In such cases, then, private authority also serves to constrain public authority from developing. 3.1 Material Structures The structural power of private actors is traditionally understood as the power to constrain policy choices by making alternatives more or less desirable for formally empowered decision-makers.56 This form of agenda-setting power derives from the ability of private actors, typically transnational corporations, to punish and reward countries for their policy choices by relocating investments and jobs.57 A more recent development in the structural power of private actors, however, is the acquisition of de facto decision-making power, i.e. their ability to design, adopt, implement and enforce their own rules in the context of self51
CEC 2002, paragraph 30 in Humphrey 2006, 578. CEC 2004, 6 in Humphrey 2006, 579. 53 The Codex Alimentarius Commission founded in 1962 by the Food and Agriculture Organization (FAO) of the United Nations and the World Health Organization 54 Sklair 2002. 55 Büthe and Harris 2011. Smythe 2009. 56 Cox 1987; Wallerstein 1979. 57 Fuchs 2005. 52
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regulation.58 In this article, we are particularly interested in self-regulatory activities by retailers as these represent the most prominent new channel for the exercise of structural power by private actors. We argue that structural power emerges from material structures, i.e., structures that foster and prohibit access to and transaction of key material resources (most broadly, control access to the market), which enable particular private actors, typically transnational corporations, to exercise control over others. The dominance of a few corporations in a vast range of market segments fosters their ability to limit the choices available to actors, specifically suppliers and labor, who desire entry. Control over supply chains enables retail corporations to determine who may gain access and on what terms. Material structures, then, embody processes of inclusion and exclusion and foster relations of dominance and subordination.59 In the context of our analysis, these material structures grant agrifood corporations, especially retail food corporations, the power to impose their rules and norms on suppliers, from farmers to food processors. Yet, as we discuss below, the implications of retail structural power extend to other socioeconomic groups as well. Retailers did not always fare prominently in agrifood governance. The demise of national and agrarian forms of Keynesianism in the late twentieth century fostered a restructuring of supply chains across national borders and towards greater concentration, which occurred initially on the supply side of agrifood chains.60 As a result, big and powerful food producing and manufacturing conglomerates such as ConAgra and Cargill, emerged, particularly in the US. A number of developments in food retailing, however, and the spread of globalization—facilitated in part by new food, communications and transportation technologies—led to shifts in power towards the end of the supply chain, i.e., retailers.61 More specifically, retail capitalism has benefitted from capital concentration among food retailers creating large transnational retail corporations as well as a widening group of consumers, currently extending across the globe. In contrast to food production actors, retailers are less dependent upon the natural and organic constraints of agriculture and food. Finally, retailers sit strategically between the consumption and the supply side.62 As a result, retail corporations emerged as the key drivers in agrifood chains fostering further territorial reconfiguration towards greater geographic stretch as well as greater
58
Clapp and Fuchs 2009; Fuchs 2005. See also Beetham 1991. 60 Morgan et al 2006. 61 Henson and Reardon 2004; Nadvi 2004. 62 Morgan et al 2006. 59
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concentration in the buyer end of these chains.63 Through global acquisitions and mergers, we can currently observe a diminishing number of internationally operating supermarket chains (see Table 1) whose market share has constantly increased in the last two decades to an extent that regional market structures need to be characterized as highly oligopolistic.64 A number of examples illustrate this argument. In the United States, the five largest supermarket chains have almost doubled their market share between 1997 and 2005, from 24 to 42 percent.65 In the European Union, the top five retailers control more than 70 percent of the groceries retail market on average.66 In individual countries, concentration is even higher. In Finland, for example, the top five retailers control 90 percent of the market, while concentration is between 70 and 80 percent in Sweden, Ireland, Slovenia, Estonia, Austria, Germany and France.67 Concentration is also high in developing countries. Reardon, Timmer and Berdegue report that in Latin America the top five chains per country control 65 percent of the supermarket sector.68 High retail concentration has two key effects. First, the extent of market control that the largest food retail corporations currently have in the important European and North American markets implies a degree of economic power that cannot be ignored. Retailers, in particular, are increasingly able to dictate prices. In that context, reports reveal that many supermarkets are selling food products at prices manifold the cost of production, without corresponding benefits for farmers. In New Zealand, a Green Party survey revealed that supermarkets are
63
For a more elaborate discussion on the distinction between supplier or “producer-driven” and retail or “buyer-driven” supply chains see Gereffi 1995; Gereffi et al 2005; Tallontire et al 2011. 64 Burch and Lawrence 2005; Konefal et al 2005. 65 Morgan et al 2006. 66 Planet Retail 2006a. 67 Planet Retail 2006a. 68 Reardon, Timmer and Berdegue 2004. Published by Berkeley Electronic Press, 2010
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Table 1 Top 30 Grocery Retailers Worldwide, 2006 Country of Origin
Net Sales in 2006 (US$ m)
Grocery retail banner sales (%)
Domestic sales (%)
Foreign sales (%)
Wal-Mart Carrefour Metro Group Tesco Seven & I Ahold Kroger Sears Costco Target Rewe Casino Schwarz Group
USA France Germany UK Japan Netherlands USA USA USA USA Germany France Germany
344,992 97,739 75,131 78,451 41,600 56,299 66,111 53,012 58,963 59,490 54,515 25,752 50,224e
45.6 73.9 48.0 73.3 67.8 84.4 70.5 11.8 61.0 30.4 75.3 74.7 82.6
78 47 45 75 66 18 100 88 80 100 68 58 54
22 53 55 25 34 82 0 12 20 0 32 42 46
AEON Aldi Auchan Walgreens Edeka CVS Safeway Leclerc ITM Sainsbury Woolworths SuperValu Tengelmann Coles Group Loblaw Delhaize Group
Japan Germany France USA Germany USA USA France France UK Australia USA Germany Australia Canada Belgium
41,431 49,948e 48,408e 47,409 40,277e 43,814 40,185 36,432 33,976e 31,360e 31,243e 37,406 29,255e 27,921 25,242 24,121
55.5 83.5 62.6 36.0 85.4 30.0 75.4 61.4 76.9 75.6 72.1 73.0 62.0 54.8 76.7 77.0
90 53 50 99 93 100 83 94 90 100 89 100 58 99 100 23
10 47 50 1 7 0 17 6 10 0 11 0 42 1 0 77
Morrisons
UK
22,927
77.9
100
0
Retailer
Total Top 30
1,928,618
Source: Planet Retail 2006b. Retail banner sales are the sum of the sales of all stores under a retailer's banner. estimate.
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e
indicates
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pricing fresh fruit and vegetables up to 500 percent higher than the costs of production.69 At the same time, apple suppliers are getting the same price they were paid twelve years ago: 50 cents a kilo.70 In Europe, while in the late 1950s farmers received half the retail price of food, this has now slumped to 7 percent in the UK and 18 percent in France.71 UK potato producers, for instance, are reportedly paid £44.81 per tonne of standard white potatoes, while shoppers are charged an equivalent of £724.25 a tonne.72 In Ireland, while profits from supermarket milk have increased by €150 million as a result of double-digit percentage rises in food prices in 2007, farmers received less than a third of the gains.73 In Norway, studies have documented a dramatic drop in farmers’ selling power as a result of increasing retail concentration, as well.74 This list of evidence provided by individual reports and studies could be continued. Importantly, there are no studies documenting opposing developments. Second and more importantly from our perspective, high market concentration not only allows retailers to determine prices, but also to impose their own standards on suppliers, since retailers are often also in an oligopolistic or even monopolistic position vis-à-vis suppliers. In developing countries, in particular, any one food retailer is often the sole purchaser for a given type of product. In other words, market control grants them the power to govern. Some supermarket organizations have generated their own quality assurance and safety schemes including unannounced inspections at farms, gardens and plants. Most commonly however, retailers develop standards collectively. GlobalGap, GFSI and BRC, mentioned in the previous section, are examples where global retailers jointly develop standards with the aim to regulate aspects of food safety, quality and environmental sustainability in the food system. With this form of institutionalized cooperation, retailers are able to impose demands on producers and producing countries that are difficult to avoid. Compliance with these standards by the participating agricultural and food companies is certified through independent auditors. Auditing takes place normally once a year. If suppliers are found not to comply with the standards, they are first issued a warning, in a second step they temporarily lose their license, and finally they are excluded from the standard. In addition to conducting regular audits, retailers may also select suppliers for special independent audits based on risk assessments. “High risk” suppliers are considered those situated in countries 69
Harward 2010. Harward 2010. 71 European Parliament 2009. 72 Uhlig and Foster 2002. 73 Thanassoulis 2008. 74 OECD 2005. 70
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with problems, such as poor human rights records (e.g. China) or industries specifically targeted by the media (such as the Kenyan horticulture sector).75 On the basis of their market power and auditing techniques, then, retailers are able to exercise control at a distance over supply chains and suppliers, and determine what is appropriate and acceptable in terms of prices and quality. Worldwide suppliers, in turn, “voluntarily” succumb to demands that grant them entry to the desired market controlled by retailers. Other stakeholders are affected by the structural power of retailers, as well. Consumers are affected by the ability of retail oligopolies to predetermine their choice sets. Thus, the variance on retail shelves decreases if a given product is not sufficiently profitable for retailers. On the positive side, consumers may benefit from lower prices, increases in quality, and some improvements in transparency, although the latter tend to be limited. Furthermore, food processors are affected by retail power. As noted above, capital concentration in food retailing has led to a shift in power along the supply chain. While food processors still hold considerable structural power towards producers, they are in a power contest with retailers on the other side. Finally, governments are affected by the structural power of retailers in that their own ability to regulate may be challenged. Scholars note, for instance, that GlobalGap is in competition with public standards in Europe and has prevented national food safety regulation from developing.76 3.2 Ideational Structures Retailers’ power to govern based on market control would remain fragile and potentially ineffective, if it was not paired with legitimacy, however. It is the aspect of legitimacy which turns private power into private authority and thereby reduces the potential to challenge it. A number of different audiences, including the targets of regulation, consumers, governments and intergovernmental organizations, and the broader civil society, are relevant for granting authority to private rule.77 Even though not all of these audiences are subjects of private authority per se (in the sense that they have to comply with private regulation), they all experience its existence and/or have to face its consequences. Importantly, retail authority is not being granted by retailers’ suppliers (the targets of regulation), for the most part. Indeed, legitimacy for these actors would derive primarily from “pragmatic sources”,78 such as gaining access to high 75
Hughes 2007. Maze 2010. We cannot be certain that in the absence of retail standards, governments would have implemented superior regulation with better consequences for sustainability and vulnerable socio-economic groups in comparison to retail standards. 77 See also Cashore 2002. 78 Cashore 2002. 76
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valued markets and/or getting price premiums for their products. As was shown earlier, however, this is frequently not the case. Often suppliers simply have no other choice than to adopt a given retail standard. Rather, food retailers derive their legitimacy mostly from the perception of consumers and governments in developed countries, and an emerging consumer class in developing countries, that retailers are doing the right thing and that they are the best actors to do it. How do we know that these audiences have, indeed, accepted retail rule as legitimate? First, the new food regulatory context with the proliferation of retail standards is an indicator of legitimacy. Power may have made the development of private rule possible. That the exercise of that rule has not been challenged, neither by consumers and nor by governments, however, is a sign of its acceptance by these audiences. Simultaneously, retailers have assumed an increasingly important role within public regulatory bodies. This is especially evident in the EU where retailers, via their umbrella organization Eurocommerce, have acquired Board representation within the European Food Safety Authority (EFSA).79 The EFSA is an organization created in the aftermath of the Bovine Spongiform Encephalopathy (BSE) crisis with the aim to provide “independent scientific advice and clear communication of existing and emerging (food) crises” and plays a key role in EU food governance.80 Flynn et al. (2003) also observe that the articulation of the principles of traceability and Hazard Analysis and Critical Control Points (HACCCP) in and through supply chains and as a way of regulating these supply chains is very much related to the active retail presence in the EFSA. Next to their new political role, retailers are also often accepted as custodians and guardians of the consumer interest. Indeed, retailers are not merely regarded as providers of food any more, but also as “educators”81 helping consumers to make their choices and teaching them “how to live the good life.”82 Here, too, governments play a facilitating role, legitimating private regulators. In the realm of sustainable consumption, in particular, the UK government underlines its belief that governments and businesses both have the responsibility to enable consumers to make sustainable choices.83 In a recent report, the UK government also appealed to retailers to help consumers eat a healthy and sustainable diet.84 Likewise, the European Commission sees retailers in a strong
79
Flynn et al 2003. http://www.efsa.europa.eu/en/aboutefsa.htm 81 Durieu 2003, 8. 82 Dixon 2007, 31. 83 Defra 2005, 44. 84 Defra 2010. 80
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position to improve the sustainability of consumption and support an agenda to empower citizens, as consumers, to make sustainable environmental choices.85 Some civil society organizations also contribute to the perception of retailers as legitimate political actors. In a 2005 statement, for example, the Executive Director of the Sierra Club, America’s oldest and largest environmental organization, commended Wal-Mart for its efforts to reduce pollution and waste and take positive steps towards safer and healthier communities.86 Other civil society organizations, however, have criticized retail environmental and social practices and thus challenged the authority of food retailers.87 In a larger perspective, social movements such as the peasant-led Via Campesina (originating in the Global South) and elements within food localization and the Slow Food movements (originating in the Global North) project a very different understanding of food systems emphasizing, among other things, food sovereignty and local food sourcing.88 In such alternative representations of food systems, the dominance of a few large retail corporations is viewed very critically. Thus, it is only a small segment of the global population that grants retail regulation its authority. It is, however, the crucial segment, as consumers and governments particularly in developed countries, in contrast to farmers especially in developing countries, are the ones with a choice: a choice to protest, to shop elsewhere, or to demand and impose public regulation.89 Retailers’ legitimacy as rule setters, then, results primarily from the dominant ideational structures in developed countries and the political and economic elites of developing countries. Ideational structures are structures that produce and reproduce ideas with the aim to inform and shape the public (and/or political elites’) mind with respect to certain issues. Such structures are numerous and can take different forms ranging from cultural norms and values to the media or the educational system, for example. The role these ideational structures play in establishing and framing legitimacy is an emergent theme in the literature of global governance.90 We argue that the construction of legitimacy via ideational structures consists of two dimensions: a constitutive dimension that reflects norms and mindsets; and a strategic dimension trying to achieve certain ends by attempting 85
European Commission 2008, 8. Fuchs and Kalfagianni 2009. 87 See ActionAid International 2005; Friends of the Earth 2005. 88 McMahon 2011. 89 We do not mean to suggest that such actions are simple, of course. Consumers, for instance, are constrained by information asymmetries, collective action problems, and oligopolistic markets. Nevertheless, a choice remains. 90 see Chouliaraki 2006; Hansen and Hoff 2006. 86
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to influence these norms and mindsets.91 Indeed, as was mentioned earlier, legitimacy is granted to actors when they are seen as operating within the limits of what is considered “appropriate” or “right”.92 In that context, the audience also creates the boundaries of actors’ authority, which again emphasizes that authority is relational. Legitimacy is also malleable, however. Rather than simply carrying out their actions in the context of generally accepted norms and beliefs, actors can also try to shape them. A number of business activities can be recognized in that area, notably the framing of their own and other actors’ identity, as well as attempts to influence general societal norms and ideas.93 Below we identify sources of legitimacy relevant both in constituting retail authority and altering it strategically. First, retail authority is to a large extent based on the dominance of liberal and neoliberal norms and ideas. These norms and ideas provide value to certain societal objectives over others. Thereby, they also assign roles and evaluations of these roles to actors. Specifically, the neoliberal focus on economic growth and efficiency together with the assumption that the pursuit of these objectives is the most effective way to improve societal well-being provides legitimacy to business actors’ interests.94 At the same time, ideas of the benefit of voluntariness and achievement-oriented reward systems attribute value to a “small state” and discredit political intervention and public bureaucratic management. Proponents of these ideas point out that voluntary private institutions can either supplement or precede public regulation or even make public regulation unnecessary.95 The universality of the success of these claims is evident in the privatization trend, which has been taking place across countries and cultures and spreading across domains, even politically sensitive ones, such as security, in the last decades.96 In the context of neoliberal norms, effectiveness appears as the key characteristic of retailers’ self-representation. Retail claims of effectiveness and efficiency in pursuing social welfare (beyond the provision of jobs and incomes) are promoted primarily via corporate social responsibility (CSR) reports. CSR reporting is based on the idea that, “in order to continue operating successfully, corporations must act within the bounds of what society identifies as socially acceptable behavior”.97 However, such reporting can also be used to shape ideas and create expectations.98 91
see also Hansen and Salskov-Iversen 2008. see also Bernstein and Cashore 2007; Thirkell-White 2006. 93 Fuchs 2005. 94 Fuchs 2005. 95 Gunningham 1995; Webb 2004. 96 Lock 2001; Muthien and Taylor 2002. 97 O’Donovan 2002, 344 in Tregidga et al 2007. 98 For an extensive analysis of CSR, see Vogel 2005. 92
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Retailers present themselves as effective in protecting food and the environment; establish cost-effective farming practices, ensure standard effectiveness, effectively address health inequalities, have transparent and effective policies, effectively promote sustainability, be effective social partners, have effective systems and communicative policies, exercise effective mentorship and leadership, and so on. Tesco’s 2009 CSR report mentions, for instance, that “managing environmental, social and governance issues is essential to good corporate governance, as these impact on reputation and long-term success of the business. We have clear, transparent and effective policies and processes for managing our business responsibly and in accordance with the law.”99 In addition, it emphasizes “We have simple and robust monitoring processes in place to ensure our livestock standards are effective.”100 Likewise, Wal-Mart underlines the effectiveness of Sustainable Values Networks (SVN), the tool designed to implement its program Sustainability 360, in driving and promoting sustainability.101 Similar statements are made by all major retailers. Simultaneously, retailers attempt to belittle the relevance of public actors in that context. Such effort is well reflected in an interview statement by David Blackwell, Wal-Mart’s vice president, to Fortune Magazine: “Governments don’t make any goods, businesses do. So, it’s going to be companies, not governments, that solve these problems.”102 This is a well-known argument made in many other business sectors in a similar way, today. In general, the notion that private actors do things better is closely tied to discourses about the inefficiency of governments and international organizations as global regulators.103 Second, knowledge is a fundamental source of legitimacy for private actors. Possession of expertise or “technical authority”104 allows private actors to elicit compliance with their rules because the latter are perceived as having an objective quality and political neutrality.105 The increasingly important role of epistemic communities, bond rating agencies, and certification bodies, for example, can be understood in the context of the creation of technical authority. Knowledge and expertise also appear prominently in retailers’ reports. The role of nutritional, agriculture, training, and technical expertise in every step of the supply chains is highlighted in many CSR reports. Moreover, the provision of technical advice to the—“not sufficiently knowledgeable”—public actors, which makes them indispensable social partners and allows them to draw on public 99
Tesco 2009, 47. Tesco 2009, 27. 101 Wal-Mart 2009. 102 Ferdinand 2007. 103 Fuchs 2005; Hall and Biersteker 2002; Harten 2005. 104 Porter 2005. 105 See also Haas 2004; Thirkell-White 2006. 100
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actors’ traditional legitimacy is also emphasized. Thus, Tesco highlights their cooperation with international organizations, such as the Food Standards Agency in providing technical advice, Metro with the UN World Summit on Sustainable Development 2002 or the ILO, or Kroger with the US Department of Labor.106 Third, the protection of consumer health and safety are fundamental objectives in the global food governance as a result of repeated food crises107 and a turn towards more obesogenic diets worldwide. Food is the number one cause of premature death in the western world due to the increasing consumption of fattier, saltier, and sweeter foods and drinks.108 A “nutrition transition” also affects urban populations in developing countries and distinctive national diets through a decline in the consumption of traditional foods, increased intakes of fat, sugar, salt and often animal foods, an increase in the consumption of processed foods, as well as an overall reduction in dietary diversity.109 The responsibility of retailers towards food safety is emphasized throughout their CSR reports and takes place mainly via the establishment of HACCP and traceability systems as noted above. According to Carrefour, “Food product safety is non-negotiable.”110 For Tesco achieving food safety is of “paramount importance.”111 Wal-Mart strives to achieve “higher standards of product safety and quality.”112 Regarding broader health concerns, retailers appear to encourage healthy lifestyles by describing how they offer the choice of “low fat and low calories” products and through the display of nutritional information on own-brand products, as well as the pledge to reduce the content of fat, salt and sugar in ready meals.113 Healthy eating campaigns, annual nutrition and health events at home and in their foreign operations, form an integral part of retailer’s performance of their commitment to consumers’ well-being.114 Fourth, attention to environmental and social concerns is an increasingly important aspect of legitimacy in the global domain.115 Environmental and social norms are embodied in international treaties, “soft” declaratory international law, action programs or statements by leaders.116 The importance of these norms for business actors is reflected, for instance, in the growing number of global initiatives, standards and public-private partnerships in the sustainability field, 106
Kroger 2007; Metro 2006; Tesco 2009. World Bank 2005. 108 Popkin 2001. 109 Millstone and Lang 2008. 110 Carrefour 2008, 39. 111 Tesco 2009, 43. 112 Wal-Mart 2009, 68. 113 Hughes et al 2009. 114 Hughes et al 2009. 115 Bernstein 2005. 116 Bernstein and Cashore 2007. 107
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such as the Forest Stewardship Council, the Global Compact, and the adoption of fair trade and ethical trading initiatives. It also becomes apparent in the recurring theme of community and local values. Our Global Neighbourhood, the title of the report of the Commission on Global Governance,117 is indicative of the survival of these norms and ideas, even in the era of neoliberalism. Attention to environmental and social concerns is a central theme of retailers’ discursive campaigns. Through advertisements, public relations (PR) campaigns, and corporate social responsibility (CSR) reports retailers present their efforts in “greening” business, enhancing the quality of products and being a responsible “citizen” on the basis of own brands and standards. Simultaneously, however, retailers also attempt to define these issues. A recent analysis of CSR reports of the ten biggest global retailers reveals that sustainability, a fundamental multi-dimensional concern in global food governance, is limited to eco-efficiency and good environmental management, here.118 The delegation of responsibility to consumers and employees depicted as co-participants in efforts towards achieving retailers’ sustainability strategies is an issue commonly communicated in CSR reports as well.119 To illustrate this point, we offer an example from Wal-Mart. Specifically, Wal-Mart Argentina initiated a program titled “Let’s Buy Awareness” in partnership with the ReCrear Foundation in 2009, which was advertised as promoting responsible consumer habits within local communities. In that program, customers were invited to submit their solutions to environmental problems that matter most to their neighborhoods, schools and organizations within their communities. According to Wal-Mart, more than 5,800 customers and schools submitted their recommendations, and several schools received ARS 5,000 ($1,582 USD) in prize money for their suggestions.120 In addition, retailers underline their contribution to communities by hiring local people, and providing practical support to local groups and “good causes.” Such practices also receive prominent news coverage, particularly when attracting the attention of politicians and celebrities. Tesco’s contribution to urban regeneration in Leeds, for example, was covered extensively when Tony Blair visited it.121 Fifth, scholars have explored other facets of retailers’ sources of legitimacy such as those of “charismatic” authority.122 Retailers appear as charismatic through the use of symbols and public communications. They present
117
Commission on Global Governance 1995. Fuchs and Kalfagianni 2009. 119 Hughes et al 2009. 120 Wal-Mart 2009. 121 Pal and Medway 2008. 122 Dixon 2007, 32. 118
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themselves as colorful and innovative actors who also form partnerships with other charismatic actors, such as celebrity chefs. On the basis of these strategies, retailers attempt to create brand loyalty and install trust. Appearing as valuable agents performing fundamental roles for society, retailers gain legitimacy as political actors. Retail rules then, become authoritative because retailers are viewed as effective, knowledgeable actors with health and safety, as well as environmental and social concerns, and charismatic personality. Of course, retailers are not the only actors with access to ideational structures. Especially, in democratic societies it becomes more difficult—though not impossible123—to become the dominant voice that shapes and reproduces ideas. In comparison to other societal actors such as civil society organizations, however, retailers have superior financial resources to buy media time and space. Indicatively, Wal-Mart spent $1.4 billion, $1.6 billion, and $1.9 billion in fiscal years 2005, 2006, and 2007 respectively for advertisement.124 Tesco, spent 1.1 billion Euros in advertisement in 2006.125 Of course, advertising pursues goals besides establishing legitimacy. An increasing share of advertising messages, however, carries identity framing messages going beyond the mere description of products and prices.126 Moreover, the success and longevity of communicated messages depends to a considerable extent on the ability to send repeated messages, which is greatly facilitated by the financial resources available to retailers. To sum up, on the basis of the material and ideational structures characterizing the current global political economy of food, retailers can impose rules and reach and shape sources of legitimacy. As a consequence, the power to govern is supplemented by the authority to govern, which makes retail governance much less likely to be challenged on the basis of legitimacy concerns. The privileged position in material structures allows retailers to create and enforce rules. Access to ideational structures allows them to influence norms and ideas, and frame their own and other actors’ identities, facilitating consent on their rule and rules. Together these processes serve to create, maintain and reproduce retail power and authority in global food governance. 4. Conclusion This paper examined the consequences of private regulation in global food governance and the causes and facilitating conditions of its emergence. Global 123
See, e.g., Chomsky 1997. Wal-Mart 2007. 125 Tesco 2007. 126 Keller and Lehmann 2006. 124
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retail food governance has greatly expanded its reach in the past decades, taking primarily the form of private standards and initiatives developed individually or collectively by leading retailers. The impact of such private institutions on the sustainability of the food system is currently ambiguous, at best, which underlines the necessity of an inquiry into the conditions of its emergence and legitimacy. In terms of the consequence of private food governance, we found little evidence of a significantly positive impact on the well-being of the food system. Currently, most retail environmental initiatives are selected best practices that coexist with regular operations. Rather than changing environmental behavior fundamentally, retailers simply add selected programs. Moreover, such programs are too few and have too little coverage to make an impact. We identified considerable potential in energy initiatives, but it is too soon to offer an evaluation of the adoption of such initiatives. In terms of food security, the consequences are more ambiguous. While some positive impacts can be identified, in particular improved food safety, several concerns remain. More specifically, benefits tend to accrue to a small group of the global population only. In addition, retail standards have negative consequences, particularly for farmers and small retail shops. Vulnerable and marginalized rural populations are the most severely affected groups from the emergence of private retail authority. Prompted by these rather serious implications of private food governance, the paper then inquired into the sources of retail authority. Rooted in critical theory, it argued that retail authority can be understood to have been enabled by two distinct but reinforcing mechanisms. Through strategic positions in material structures, retailers have been able to impose their rules and standards on global supply chains and demand compliance from suppliers worldwide. Through access to ideational structures, retailers have been in a position acquire legitimacy as rule setters and to strategically present themselves and their institutions as superior “regulators” in global food governance compared to public actors. What conclusions can we draw about private authority from this analysis? From a scientific perspective, this paper invites analyses that critically inquire into the mechanisms of authority creation. Here, we have suggested the particular value of examining the interaction and synergies between ideational and material structures in a given area of governance. From a political point of view, the paper reveals not only that private food authority is on the rise, with a proliferation of private standards and initiatives in crucial areas of food governance, but also that this development has problematic social consequences. Consequently, our analysis highlights both the possibility of challenging the authority of private regulation in food retailing and the need for additional public governance efforts. Furthermore, as private regulation has also been on the increase in other policy fields, our analysis suggests the need for similar critical inquiries in those fields. Normatively, our results suggest that governmental efforts should pay particular
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Lock, Peter. 2001. „Sicherheit à la carte? Entstaatlichung, Gewaltmärkte und die Privatisierung des staatlichen Gewaltmonopols.“ In Die Privatisierung der Weltpolitik, edited by Tanja Brühl, Tobias Debiel, Brigitte Hamm, Hartwig Hummel and Jens Martens. Bonn: Verlag J.H.W. Dietz Nachfolger, 200-231. Lyons, Kirsten. 2007. “Supermarkets as Organic Retailers: Impacts for the Australian Organic Sector.” In Supermarkets and Agrifood Supply Chains edited by David Burch and Geoffrey Lawrence (eds.). Edward Elgar: Cheltenham/Northampton, 2007: 154-172. Mattli, Walter and Tim Büthe. 2003. “Setting International Standards: Technological Rationality or Primacy of Power?” World Politics 56 (1): 142. Mayer, Frederick, and Gary Gereffi. 2010. “Regulation and Economic Globalization: Prospects and Limits of Private Governance.” Business and Politics 12 (3). Maze, Armelle. (2010). “The Globalisation of Standard Setting Activities in AgriFood Sectors: A Governance Perspective.” Paper presented at the Third Biennial Conference of the European Consortium of Political Research’s Standing Group on Regulatory Governance with the subject Regulation in the Age of Crisis, UCD Dublin, 17-19 June. McMahon, Martha. 2011. “Standard Fare of Fairer Standards: Feminist Reflections on Agri-food Governance.” Journal of Agriculture and Human Values (forthcoming). McMichael, Philipp. 2004. “Global Development and the Corporate Food Regime.” Paper presented at the Symposium on New Directions in the Sociology of Global Development. XI World Congress of Rural Sociology. July 25-30, 2004. Metro. 2006. Metro Sustainability Report 2006. http://metro-group.com. Millstone, Erik and Tim Lang. 2008. The Atlas of Food. Who Eats What, Where, and Why. London: Earthscan. Mingione, Enzo and Enrico Pugliese. 1994. “Rural Subsistence, Migration, Urbanisation and the New Food Regime.” In From Columbus to ConAgra: The Globalisation of Agriculture and Food edited by Alessandro Bonnano, Lawrence Busch, William Friedland, Lourdes Gouveia and Enzo Mingione. Lawrence, Kansas: University Press of Kansas, 52-86. Morgan , Kevin, Terry Marsden and Jonathan Murdoch. 2006. Worlds of Food. Oxford: Oxford University Press. Muthien, Bernadette and Ian Taylor. 2002. “The Return of Dogs of War? The Privatization of Security in Africa.” In The Emergence of Private Authority in Global Governance, edited by Rodney Bruce Hall and Thomas J. Biersteker. Cambridge University Press: Cambridge, 183-202.
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Nadvi, Khalid. 2004. "Globalisation and Poverty: How Can Global Value Chain Research Inform the Debate?" IDS Bulletin 35 (1): 20–30. Neilson, Jeffrey and Bill Pritchard. 2007. “The Final Frontier? The Global RollOut of the Retail Revolution in India.” In Supermarkets and Agri-food Supply Chains edited by David Burch and Geoffrey Lawrence. Cheltenham: Edward Elgar, 219-242. NRC. 1995. Standards, Conformity Assessment and Trade. Washington DC: National Research Council. O’Donovan, Gary. 2002 "Environmental disclosures in the annual report: Extending the applicability and predictive power of legitimacy theory." Accounting, Auditing & Accountability Journal 15 (3): 344 – 371. OECD. 2005. Competition and Regulation in Agriculture: Monopsony Buying and Joint Selling, May. http://www.oecd.org/dataoecd/7/56/35910977.pdf. OECD. 2006. Competition and Regulation in Agriculture: Monopsony Buying and Joint Selling. Paris: OECD. Pal, John and Dominic Medway. 2008. "Commentary." Environment and Planning A 40: 761-765. Planet Retail. 2006a. Global Retail Concentration. www.planetretail.net (Last accessed September 2009). Planet Retail. 2006b. Top 30 Grocery Retailers Worldwide, 2006. Planet Retail Bulletin no.198, 17 May 2006, at www.planetretail.net (Last accessed September 2009). Popkin, Barry. M. 2001. “An Overview on the Nutrition Transition and its Health Implication: the Bellagio Meeting.” Public Health Nutrition 5 (1A): 93-103. Porter, Tony. 2005. “Private Authority, Technical Authority, and the Globalization of Accounting Standards.” Business and Politics 7 (3): 1-30. Porter Tony and Karsten Ronit. eds. 2010. The Challenges of Global Business Authority: Democratic Renewal, Stalemate or Decay? New York: SUNY Press. Prakash, Aseem and Matthew Potoski 2006. The Voluntary Environmentalists. Cambridge: Cambridge University Press. Reardon Thomas, Peter Timmer and Julio Berdegue. 2004. "The Rapid Rise of Supermarkets in Developing Countries: Induced Organizational, Institutional and Technological Change in Agrifood Systems." Paper presented at the Meetings of the International Society for New Institutional Economics, Tucson, Arizona, September 2004. Rosenbloom, Stephanie. 2009. “At Wal-Mart, Labels to Reflect Green Intent. ” New York Times, 15 July 2009. Scharpf, Fritz. 1998. Demokratie in der transnationalen Politik. In Beck, Ulrich (ed.). Politik der Globalisierung. Frankfurt a. M.: Suhrkamp, 228-253.
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Sklair, Leslie. 2002. “The Transnational Capital Class and Global Politics. Deconstructing the Corporate-State Connection.” International Political Science Review 23 (2): 159-174. Smythe, Elizabeth. 2009. “In Whose Interests? Transparency and Accountability in the Global Governance of Food: Agri-business, the Codex Alimentarius and the World Trade Organization.” In Corporate Power in Global Agrifood Governance, edited by Jennifer Clapp and Doris Fuchs (eds.). Boston: MIT Press, 93-123. Starobin, Shana and Erika Weinthal. (2010). “The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label.” Business and Politics 12 (3). Sustainable Energy and Environment Design. 2008. “European Retailers Promise 20% Energy Reduction by 2020.” http://www.icscseed.org/node/328/view 13.04.09. Tallontire, Anne, Maggie Opondo, Valerie Nelson and Adrienne Martin. 2011. “Beyond the Vertical? Using Value Chains and Governance as a Framework to Analyse Private Standards Initiatives in Agri-Food Chains.” Agriculture and Human Values (forthcoming). Tesco. 2007. Tesco Corporate Social Responsibility Report. http://tescocorporate.com. Tesco. 2009. Tesco Corporate Social Responsibility Report. http://tescocorporate.com. Thanassoulis, John. 2008. Europe’s Farmers do not Reap the Benefits of Higher Food Prices, 13 June 2008, available at europeanvoice.com (Last accessed July 2010). Thirkell-White, Ben. 2006. “Private Authority and Legitimacy in the International System.” International Relations 20 (3): 335-342. Tregidga, Helen, Markus Milne and Kate Kearins. 2007. "The Role of Discourse in Bridging the Text and Context of Corporate Social and Environmental Reporting." Paper presented at the 5th Australasian Conference on Social and Environmental Accounting Research, Wellington, New Zealand, 2224 November, and the 5th Asia-Pacific Interdisciplinary Research in Accounting (APIRA) Conference, Auckland, New Zealand, 8-10 July. Uhlig, Robert and Peter Foster. 2002. "Angry Farmers Set their Sights on the Supermarkets." The Daily Telegraph 19 September 2002. Van der Grijp, Nicolien. 2008. Regulating Pesticide Risk Reduction: The Practice and Dynamic of Legal Pluralism. Amsterdam: Vrije University of Amsterdam. Van Dijk, Teun. 1993. “Principles of Critical Discourse Analysis.” Discourse and Society 4 (2): 249-283.
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Vogel, David. 2005. The Market for Virtue. The Potential and Limits of Corporate Social Responsibility. Brookings Institution Press: Washington D.C. Vorley, Bill. 2007. “Supermarkets and Agri-food Supply Chains in Europe: Partnerships and Protest.” In Supermarkets and Agrifood Supply Chains edited by David Burch and Geoffrey Lawrence. Edward Elgar: Cheltenham/Northampton, 243-267. Wallerstein, Immanuel. 1979. The Capitalist World Economy. Cambridge: Cambridge University Press. Wal-Mart. 2007. Wal-Mart Annual Report. http://walmartstores.com. Wal-Mart. 2009. Wal-Mart Global Sustainability Report. http://walmartstores.com. Webb, Kernaghan. ed. 2004. Voluntary Codes: Private Governance, the Public Interest and Innovation. Ottawa: Carleton University. Weber, Max. 1968. Economy and Society. Berkeley: University of California Press. World Bank. 2005. Challenges and Opportunities with International Agro-Food Standards. Washington, DC: World Bank.
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Article 6
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Private Regulation and Legal Integration: The European Example Fabrizio Cafaggi, European University Institute Agnieszka Janczuk, European University Institute
Recommended Citation: Cafaggi, Fabrizio and Janczuk, Agnieszka (2010) "Private Regulation and Legal Integration: The European Example," Business and Politics: Vol. 12 : Iss. 3, Article 6. Available at: http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320 ©2010 Berkeley Electronic Press. All rights reserved.
Private Regulation and Legal Integration: The European Example Fabrizio Cafaggi and Agnieszka Janczuk
Abstract Private regulation has become a highly debated phenomenon. Previous research has focused mostly on the effectiveness, legitimacy, and governance structure of private regulators at the global level. Few existing analyses have focused on private regulation at the European level, where only questions of interest representation have attracted attention. Analyses of the contribution of private regulation to the process of European legal integration, in particular, are lacking. We seek to fill this gap. From private rules for product safety and for financial markets, such as the Single Euro Payments Area standards, to private rules governing the professions, we observe that private regulation has facilitated and accelerated European legal integration. We argue that in some cases this effect was anticipated, especially by the European Commission, and in those cases the intended effect on European legal integration at least partly explains the rise of private regulation. I other cases, it was an incidental by-product of attempts to address market failures or achieve network legitimacy. In the conclusion, we turn to questions of accountability and legitimacy raised by the increasing importance of private regulators in the Common Market of the EU. Although the EU lacks a body of rules that imposes democratic controls on private regulators, we identify components of European law that can be used as control mechanisms. KEYWORDS: private governance, IPE, regulation Author Notes: Fabrizio Cafaggi is Professor of Comparative Law at the European University Institute, Department of Law (http://www.eui.eu/DepartmentsAndCentres/Law/People/Professors /CurrentProfessors/Cafaggi.aspx). He can be reached via email at
[email protected]. Agnieszka Janczuk is a PhD candidate in the Department of Law of the European University Institute. She can be reached via email at
[email protected]. This paper is part of a larger project, coordinated by Fabrizio Cafaggi at RSCAS and supported by the Hague Institute for the Internationalisation of Law (HIIL), on the Constitutional Foundations of Transnational Private Regulation and Governance Design. The authors thank Gerard Hartsink for useful conversations concerning the role of EPC for the harmonization of European payment system, the reviewers and editors of Business and Politics for comments on previous drafts, and particularly Tim Büthe who read several drafts and provided very thoughtful comments.
Cafaggi and Janczuk: Private Regulation and Legal Integration
1. Introduction This paper examines different ways in which private regulation contributes to European legal integration. The role of private actors in integrating markets at the regional and international level has been the subject of substantial academic debate. The existing literature addressing the role of private actors in the legal integration of markets, however, has largely adopted a global perspective,1 only occasionally a more regional one.2 Yet, the process of legal integration in different systems has taken different shapes and a comparative study of the different patterns in which private actors have contributed to these processes is missing. Also missing is any systemic analysis of the role of private regulation in the European legal integration. Empirical evidence provided in section 2 of this paper shows, however, that private regulation has a substantial impact on the path and structure of the European integration process. This paper not only provides evidence to illustrate the impact of private regulation on the process of European legal integration, but aims to provide a starting point for the comparative analysis of the role of private regulation in the processes of market integration in relation to other regional systems (NAFTA, Mercosur etc.). In the European Union (EU), the Better Regulation Agenda and new modes of governance trends3 leave private regulators in a significant and quite strategic position to foster European legal integration. As alternatives to traditional Community legislation, self-regulation of (and co-regulation with) private actors and institutions were seen as promoting wider involvement of stakeholders in the implementation of European policies and thus increasing the legitimacy of the EU. Initially, private regulation was thus considered by European policy-makers primarily as a tool for better regulation, i.e., one that allows lesser costs and more efficiency. Recently, however, the approach has changed. The EU increasingly approaches private regulation as a tool to engineer better and more comprehensive integration.4 In this paper, we show that the importance of private regulators has in fact increased in several policy areas in the EU and has substantially contributed to its legal integration. Existing scholarly contributions tend to employ the concept of private regulation and self-regulation interchangeably. However, for analytical purposes, it is useful to distinguish the two concepts. From the theoretical standpoint, selfregulation should be limited to the regulatory strategies where rule-makers and 1
E.g. Braithwaite and Drahos 2000; Cutler 2003; Mattli and Büthe 2005; Hadfield 2009; Kahler and Lake 2009. 2 E.g. Elliott, Ackerman et al 1985; Klausner 1995; Kahan and Klausner 1996. 3 See e.g. Scott and Trubek 2002; de Búrca and Scott 2006; de Búrca and Craig 2007; Weatherill 2007; Sabel and Zeitlin 2008; Scott 2009. 4 Cf. Cafaggi 2010. Published by Berkeley Electronic Press, 2010
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targets of rules/regulations5 are the same. Furthermore, in conventional selfregulation, standards are unilaterally formulated by industry players and the whole regulatory process is industry-driven. In contrast, private regulation encompasses other private leading regulators (NGOs) or multi-stakeholder scenarios. A distinctive feature of private regulation is the participation of actors coming not only from the industry but also from the public or NGO sector and from epistemic communities.6 Those different actors may cooperate, but also compete within the regulatory process, especially when some private players draft the rules while others monitor and enforce them7. Moreover, private regulation does not only concern market design and market regulation but also entails various social aspects such as fundamental rights, non-discrimination, health care, environmental protection, social security, disability, personal identity, data protection and privacy. Although private regulation has been at the center of recent academic and policy debates, from a more historical perspective it is not an entirely new phenomenon. Indeed, private regulation has its roots in long-standing European legal traditions stretching back to the Middle Ages, when it contributed to the creation of economic and social communities beyond the boundaries of public entities, be they the modern States or the older kingdoms and empires.8 Publicprivate regulatory models were also the drivers of colonialisms where Kingdoms granted powers to companies to govern the new territories.9 Over the centuries, the allocation of rule-making power has changed from private to public and vice versa with different modes in national traditions cutting across legal families.10 Although private regulation preceded the creation of the European Community, it did not attract the attention of the founding fathers in the 1957 when the Treaty of Rome was signed. Private regulation has gained its new momentum only since the 1990s. After the era of deregulation of the late 1980s, the 1990s witnessed a wave of re-regulation combined with an increased recourse to new forms of regulation, including private regulation. 11 The development and growth of new regulatory models have often been interpreted in the literature as a transfer of regulatory powers from the public to private and in that sense as privatization. However, the new regulatory forms often establish cooperative relationships between public and private rather than a 5
More on the distinction between rule-makers and targets of rules/regulations see Büthe 2010b. See Cafaggi 2006a,b,c; 2011. 7 See Büthe 2010a; 2010b. 8 See Van Waarden 2008, 84ff; Furner 2010, 92ff. 9 Novak 2009, 23ff. 10 See, but in relation to the evolution of private law, Michaels and Jansen 2006; Michaels 2007; Basedow 2008. 11 S. Vogel 1996; Jordana and Levi Faur 2004; Levi Faur, 2005; Hutter 2006, 63; Braithwaite 2008. 6
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simple transfer of regulatory powers. Thus, the growing role of private regulation does not only mean that states are now more rule-takers than rule-makers,12 but also that they contribute to the regulatory process by delegating or recognizing the activity performed by private regulators.13 The growth of private regulation is a transnational phenomenon. However, in Europe private regulation has been developing in a particular manner, especially as regards the complementarity with public regulation. This particularity stems from the multilevel structure of the European regulatory framework and from the market integration dynamics. The existence of the EU as a supranational regulator means that, unlike in the global setting, a strong public regulatory framework for transnational private regulators within Europe is present. This framework provides the foundations for the normative analysis of the regulatory powers of private regulators, including their legitimacy and accountability towards directly and indirectly affected parties. This feature, similar to that of nation states, is lacking at the global level where public institutions are fragmented and sector-specific, and often their goals are conflicting with each other. The similarity to the nation state is, however, limited. The interaction of the European and national levels may imply particular vertical regulatory tensions between EU and its member states (MS) concerning market integration, social and fiscal policies. The European setting, with its vertical allocation of legislative competences but also its special transnational and sometimes supranational role for the judiciary, is therefore a special case for the study of private regulation and its impact on legal integration. The complementarity between the public and private sphere takes specific forms at the European level and warrants a separate analysis from that of nation states. The paper proceeds as follows. In the following section we discuss key elements of the Euro payment systems, technical standardization, product safety rules, and the regulation of professional services to illustrate different ways in which private regulation contributes to European legal integration and to some degree to legal disintegration and fragmentation. Then, we discuss more generally and theoretically the role of private regulation in European integration. The final section, addresses problems of legitimacy and accountability of private regulators. 2. Models of Private Regulation in the EU The role of private regulators has been increasingly important in several policy areas. Across the sectors it operates in different ways: through the enactment of framework contracts, master agreements, rulebooks, codes of conduct, standard 12 13
Braithwaite and Drahos 2000. See, e.g., Büthe and Mattli 2011.
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contract forms and the like.14 In this section, we briefly discuss several examples of private regulation in the transformation of the regulatory landscape and in European legal integration. These examples illustrate the different models that have been operating in the European setting. Differences concern the governance of private regulators, the regulatory instruments and their enforcement, with consequences for the relationship between legitimacy and effectiveness. The contribution to European legal integration is characterized by different forms of complementarity with public intervention, in particular with the European Commission. In some cases the integrating function is explicit and recognized in an ex ante agreement or an act of ex post endorsement; in other cases it is only implicit albeit not less effective.15 The process through which complementarity occurs affects the allocation of rule making power between public and private regulators and that of review, producing different institutional frameworks all characterized by the strong role of private regulation.16 2.1 Single Euro Payments Area (SEPA) Private regulation is particularly significant in the integration of financial markets. Privately produced rules include, for example, listing conventions, conventions for calculating accrued interest, conventions for delivery versus payment, accounting standards, and many other standards used by the market. Electronic payment instruments represent a distinct example of market creation. In many jurisdictions electronic payment instruments have long been mainly or exclusively regulated by private agreements. In Italy, for instance, electronic payment services have not been directly regulated by (public) law, and only the recent Payment Services Directive (PSD)17 generated binding legislation in this field. In general, electronic payments systems have long been developing at the national level resulting in a high differentiation of technical rules, business standards and legal environments, thereby increasing costs for cross-border
14
For an overview of private regulation activities in the field of consumer protection within the EU see van der Zeijden and van der Horst 2008. 15 See Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the regions on the Enforcement of the Consumer Acquis COM(2009) 330 final (2 July 2009) where complementarity of public and private regulation is explicitly discussed. http://ec.europa.eu/consumers/enforcement/docs/Communication_en.pdf 16 Complementarity is here used as defined and discussed in Cafaggi 2006a. 17 European Parliament and the Council, Directive 2007/64/EC of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC [2007] OJ 319/1. http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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payments.18 Since the creation of the European Monetary Union, European public institutions expressed the necessity to create an integrated payment system.19 However, MS in which national banking systems are at least partly publicly owned have resisted this idea. This opposition has been counterbalanced, however, by transnational banks, some of which have been the key drivers of financial integration. Their support, combined with the (informal) support of the European Commission and the ECB, led to the introduction of the europayment system. The reshaping of the infrastructure, harmonization and consolidation of payment settlement systems has been particularly swift in large-value payment systems. A first clearing and settlement system for ECU was created already in the mid-1980s. This was a private initiative started by a group of banks under the umbrella of the ECU Banking Association (EBA).20 In 1998, the EBA launched a new payment system for large-value payment, the EURO 1, intended to satisfy transaction volumes in Euro.21 In 1999, the European Central Bank (ECB) created a public “competitor” for the EBA clearing system: the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system. TARGET is used for the settlement of central bank operations, cross-border and domestic interbank transfers as well as other large-value euro payments. Alongside EURO 1, it has been an essential vehicle for the implementation of the 18
Schuck and Syrbe 2008. See, for instance, European Central Bank, “Improving cross-border retail payment services in the euro area – the Eurosystem’s view” (13 September 1999), http://www.ecb.int/press/pr/date/1999/html/pr990913_2.en.html (accessed 1 December 2009); European Parliament, “Improving Cross-border Payments in the Euro Area” Economic Affairs Series ECON 123 EN (June 2000), http://www.europarl.europa.eu/workingpapers/catalog/catecon_en.htm (accessed 1 December 2009). It should be noted, however, that the European institutions had recognized the need for integration of the retail payments market as a necessary precondition for building a single market much earlier and had introduced several, but rather fragmented, legal acts in this area: European Parliament and the Council Directive 97/5/EC, [1997] OJ L 43/25, on cross-border credit transfers; Commission Recommendation (EEC) 87/598 of 8 December 1987 on a European Code of Conduct relating to electronic payment (Relations between financial institutions, traders and service establishments, and consumers) [1987] OJ L 365/72; Commission Recommendation (EEC) 88/590 of 17 November 1988 concerning payment systems, and in particular the relationship between cardholder and card issuer [1988] OJ L 317/55; and Commission Recommendation (EC) 97/489 of 30 Jul. 1997 concerning transactions by electronic payment instruments and in particular the relationship between issuer and holder [1997] OJ L 208/52. 20 With the launch of the Euro it has transformed its name into Euro Banking Association; http://www.abe-eba.eu, assessed 13 January 2010. We would like to thank Gilbert Lichter for a useful conversation concerning EBA. 21 At the end of 1998 EBA handed over EURO1 to EBA CLEARING. See http://www.abeeba.eu/Historical-background-N=EA_Historicalbackground-L=EN.aspx, accessed 13 January 2010. 19
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monetary policy for the Eurosystem and has helped to create a single money market within the eurozone.22 In the area of retail payments, developments have been much slower. European public institutions abstained from taking action and continuously exercised pressure on banks to move forward. In 2001, the Commission, disappointed with the lack of progress, adopted Regulation 2560/2001, which established the principle of equal charges for cross-border payments and comparable domestic payments within the EU.23 From then on, banks could not pass on the higher costs of cross-border payments to their customers. Regulation 2560/2001 was a strong and effective public intervention.24 As a result, in 2002 a group of banks established the European Payments Council (EPC) as an industry governance structure for the harmonization of retail electronic payments.25 In the same year, this group of banks formulated the vision of SEPA as an “area where citizens, companies and other economic actors will be able to make and receive payments in Euro, within Europe (…), whether between or within national boundaries and under the same basic conditions, rights and obligations, regardless of their location.”26 The EPC has promoted the integration of the European market for three payment instruments: credit transfer, direct debit, and payment cards. Framework contracts (rulebooks) specifying uniform business rules and technical standards have been used as a “legislative” instrument to achieve integration.27 The creation of uniform rules for the entire payments industry in Europe has been aimed at reducing transaction costs and coordination among system participants. The Rulebooks set up the European framework for payment transactions under their scope, leading towards private legal harmonization. They regulate the relationships between payment service providers defining common rules for the entire payments industry. Each payment service provider wishing to join SEPA needs to sign an “Adherence Agreement” where it undertakes to comply with the Rulebooks. Through the net of Adherence Agreements, Rulebooks become 22
Bank of International Settlements, “Payment systems in the euro area” (Red Book 2003) http://www.bis.org/cpss/paysys/ECBComp.pdf, accessed 13 January 2010, 75. 23 Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December 2001 on cross-border payments in euro [2001] OJ L 344/13. 24 For a more detailed discussion of the evolution of the integrated market in retail payments in Europe, see Janczuk 2011. 25 See the EPC Charter available at http://www.europeanpaymentscouncil.eu/documents/EPC13209_Charter_%28EN%29.pdf, accessed 18 January 2010. 26 EPC “EPC Roadmap 2004-2010”, http://www.europeanpaymentscouncil.org/documents/Roadmap%20public%20version%204th%2 0April.pdf, accessed 1 December 2009. 27 Rulebooks are complemented by more detailed and more technical documents which step-bystep indicate steps that payment service providers must undertake in order to perform a particular payment service. All have been developed by the EPC. http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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multilateral contracts, creating rights and obligations for all network participants towards each other. To opt in is voluntary but once they have signed they are legally bound to comply with the obligations and undertakings of the Agreement and Rulebooks. The Rulebooks regulate the inter-bank sphere only, i.e., they lay down rules to be followed by banks when processing payments, as well as rights and obligations of banks towards each other. They do not specify the rights and obligations of banks towards their customers or vice versa. Those rights and obligations are regulated by the PSD, which is the public regulatory counterpart aimed at payments integration in Europe. The current system is thus composed of a private regulatory space concerning inter-banking relationships and a public regulatory space concerning the banks-customers relationships. The two spheres are designed to complement each other, based on a division of the regulatory space according to the nature of the players.28 However, even the bank-to-customer sphere is to some extent affected by the Rulebooks. Banks wishing to offer particular services to their customers need inter-bank rules on how to process them. As a consequence, inter-bank rules determine to some extent which services can be offered to customers. For instance, in line with the PSD requirements, the Core Direct Debit Rulebook drafted by the EPC contains a refund right for consumers.29 In order to be able to offer to companies a no-refund direct debit, for which a distinct set of inter-bank rules is needed, the EPC has developed a separate B2B version of the Direct Debit Rulebook.30 Private regulation has thus internalized the differentiation between B2C (business to consumer) and B2B (business to business) relationships. The private regulatory sphere concerns relationships among banks and it produces only indirect effects on the relationships with customers. The public regulates relationships with customers, mainly consumers, and only indirectly affects the interbank system. There is a clear functional interdependence between the two systems but no explicit rules have been drafted to coordinate them.31 It is difficult to overestimate the contribution of SEPA Rulebooks to legal and economic integration in the field of electronic retail payments. The creation of the europayments system has substantially improved the ability of firms and consumers in Europe to sell and purchase goods and services cross-border. Under SEPA, customers can easily pay for goods or services purchased across Europe 28
See Janczuk 2010. Under certain circumstances a debtor can recall an authorized direct debit transaction; see Articles 62-63 PSD. 30 SEPA Core Direct Debit Scheme Rulebook v 4.0, http://www.europeanpaymentscouncil.eu/knowledge_bank_detail.cfm?documents_id=313, accessed 13 January 2010. 31 See Janczuk 2010. 29
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from their domestic bank account. Nowadays an Italian retailer purchasing widgets from a Spanish wholesaler transfers money from his Italian bank account to the seller’s Spanish bank account in exactly the same way and at the same cost as he would do within Italy32. A French consumer buying energy from Germany will be able to pay for it from her French bank account to the energy provider’s German bank account. A Polish worker migrating to Ireland will no longer have to open a new bank account there but will be able to have his salary transferred to his Polish bank account. The creation of SEPA is a distinct example of implicit delegation in the European setting. Banks did not embark on this project on their own initiative but were effectively stimulated to do so by public regulators, mainly by the Commission. The major goal to be achieved by private regulation was set by the European Regulation 2560/2001: charges for domestic and cross-border payments within Europe had to be equal.33 The principle of equal charges entered into force at a time when there was no European-level infrastructure for payments, meaning that the cost of performing cross-border payments was substantially higher than for domestic payments. The principle of equal charges decreased the profitability of cross-border payments within Europe for banks. Banks then had no choice but to develop an infrastructure that would reduce their costs. 2.2 Technical Standardization Technical standardization is perhaps the area where the empowerment of private actors for public purposes has been the most apparent and most widely discussed.34 Unlike the previous example, in which private regulation was mainly driven by firms from the regulated industry and individuals recognized first and foremost as representatives of that industry, here private regulation is carried out by individuals who are first and foremost recognized as technical experts, irrespective of employment or personal relationships they may have to industry. The private regulator formally operates through expert committees that define the standards to be sold. Clearly, both national and European industries and, to a very limited extent, NGOs play a role. Technical standardization reflects a wide variety of regulatory strategies ranging from purely independent to delegated private 32
This result is, however, not uniform across the system and some differences still persist. Regulation 2560/2001 had covered only credit transfers and payment cards. It was then replaced with the Regulation 924/2009 which extended the principle of equal charges to direct debits, so that the principle applies to all payment instruments covered by SEPA; European Parliament and Council Regulation 924/2009/EC on cross-border payments in Community and repealing Regulation (EC) 2560/2001 [2009] OJ L 266/11. 34 See, for instance, Joerges, Falke et al 1991; Joerges, Schepel et al 1999; Vos 1999; Egan 2001; Schepel 2005. 33
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regulation. For the purpose of this essay we shall concentrate on delegation based on an agreement between the European Commission on the one hand and on the other hand the European Committee for Standardization (CEN), the European Committee for Electrotechnical Standardization (CENELEC) and European Telecommunications Standards Institute (ETSI). It represents an example of delegated private regulation where the agreement specifies both the governance and the activity of the private regulators in detail.35 The two main European standardization bodies, CEN and CENELEC, were created in the early days of European integration, that is, in 1959 and 1961 respectively.36 However, for a long time their role was marginal, and it was only in the mid-1980s, when the single market program and the New Approach were launched, that they grew in importance.37 The New Approach38 was stimulated by the principle of mutual recognition which followed the judgment of the European Court of Justice (ECJ) in “Cassis de Dijon”.39 The new approach designed a co-regulatory regime distinguishing between a normative and a technical dimension. According to that design the normative tasks are allocated to European and national public institutions and the technical standardization tasks to European and national standardization bodies which are mostly composed of private actors.40 Accordingly, European directives harmonize essential requirements concerning health, safety, environmental and consumer protection (“public interest”). Essential requirements are mandatory for manufacturers but are of a very general nature. How a manufacturer or its products can fulfill the essential requirements and thus comply with any given New Approach directive is specified in harmonized technical standards set by the European standardization bodies (CEN, CENELEC, ETSI), in compliance with the requirements of the European Commission.41 The harmonized standards are transposed into national standards by national organizations.42 35
See General Guidelines for the Cooperation between CEN, CENELEC and ETSI and the European Commission and the European Free Trade Association, note 12 above. 36 A third standardization body, European Telecommunications Standards Institute (ETSI) was created in 1988. 37 Egan 2001, 135-138. 38 Council Resolution of 7 May 1985 on a new approach to technical harmonization and standards, OJ C 136, 1. 39 Case 120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein [1979] ECR 649. 40 Cafaggi 2009a, 22. 41 Annex of the Council Directive 83/189/EEC of 28 March 1983 laying down a procedure for the provision of information in the field of technical standards and regulations, 1983 OJ L 109/8. ETSI was recognized as a European standardization body in 1992; Commission Decision 92/400/EEC of 15 July 1992 amending the lists of standards institutions annexed to Council Directive 89/189/EEC, 1992 OJ L 221/55. Directive 83/189/EEC was subsequently replaced by Directive 98/34/EC of the European Parliament and of the Council of 22 June 1998 laying down a Published by Berkeley Electronic Press, 2010
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Unlike in the banking example, where no explicit coordination between public and private regulation is in place, in the field of technical standardization a legally binding agreement defines the complementary nature of the regulatory framework. The current scenario is the result of a process driven, among other things, by criticisms concerning the accountability of the regulator and the legitimacy of the regulatory process. In 1984, in an attempt to preclude allegations of unlawful delegation of power, the Commission signed an agreement with CEN and CENELEC.43 The agreement, however, apparently did not perform its legitimating function well as the EU-CEN/CENELEC relationship was strongly criticized, in particular with regard to consumer representatives’ lack of influence in the standardization process. In response to these criticisms, a new agreement between the EU Commission, the European Free Trade Area, and European standardization bodies was concluded in 2003.44 The new agreement is aimed at increasing accountability of the regulatory regime. It regulates governance of private regulators in much more detail, emphasizing CEN and CENELEC and ETSI’s openness, transparency, representativeness, participation, and independence from vested interests. The private regulators have to make fully binding commitments to ensure that stakeholders, in particular those who are not associated with the industry, are fully involved in the rule-making process. Over time, the Commission has pushed European standardization bodies to implement voting procedures (and weighted votes) similar to that in the European Council. The internal governance of European standardization bodies is usually based on consensus rather than voting, on intensive consultation of the most important constituent national standardization bodies with the obligation to take the comments into account, and the obligation to review standards periodically.45 In addition, in order to become applicable in individual MS, European standards
procedure for the provision of information in the field of technical standards and regulations [1998] OJ L 204/37 (“Information Directive”). 42 Spindler 2009, 253ff. 43 The agreement obliged the European standardization bodies to ensure that standards would satisfy the essential requirements and established a cooperation mechanism between them and the Commission. The Commission was to be notified and had the right to participate in the meetings of technical committees and was to be updated about the progress of standardization work on a regular basis. Furthermore, the agreement specified some requirements concerning internal governance of the European standardization bodies. However, they were of a very general nature. Thus, the agreement specified that CEN and CENELEC were to “ensure that interested circles, especially public authorities, manufacturers, users, consumers, trade unions, can, if they so wish, be effectively associated in the drawing up of European Standards: the Commission will, should the case arise, help in definition of the appropriate modalities”. 44 General Guidelines for the Cooperation between CEN, CENELEC and ETSI and the European Commission and the European Free Trade Association, note 12 above. 45 See Schepel 2005, 104-107; 242-246. http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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need to be implemented by national standardization bodies. As a consequence, they indirectly become subject to judicial review by national courts.46 The 2003 Agreement specifies the conditions of delegation to European standardization bodies. It renders the blank delegation included in the Information Directive a very detailed one. The interests of consumers and other stakeholders are protected not only by the specification of principles which the private standard-setters must meet, but also through the necessity to adopt some participatory mechanisms.47 Technical standards produced by European standardization bodies are voluntary for manufacturers, but mandatory for MS. That is, producers are free to decide whether they wish to manufacture their products in compliance with the harmonized technical standards (they are only required to comply with the essential requirements and can chose alternative methods of meeting them), but if they comply with CEN, CENELEC and ETSI standards, they benefit from a presumption of conformity with the essential requirements.48 MS must recognize this presumption and are thus forbidden from imposing additional requirements on products manufactured in conformity with harmonized standards.49 The only way to rebut this presumption is through the safeguard procedure—a mechanism allowing for ex post review of harmonized standards.50 Harmonized technical standards produced by private European standardization bodies have substantially contributed to legal and economic integration in the EC. First, they represent a ‘single passport’ for products or services and compliance with them grants the right to free movement. The adoption of harmonized technical standards influences the degree of fragmentation of normative standards. If safety or quality is regulated at the MS level in different ways, these divergences are in practice reduced by the ‘voluntary’ adoption of uniform technical standards resulting in uniform safety or uniform quality in the marketplace. In addition, technical standards are often referred to by courts in product liability litigation giving rise to judicial
46
See Schepel 2005, 257f. It has been argued that “standardization procedures have developed into a remarkably consistent set of truly global principles of ‘internal administrative law,’” Schepel 2005, 6. We believe that they are better described as private organizational law principles. This implies that the gap-filling function is played by organizational law depending on the governance form chosen by the regulator i.e. for profit, association, foundation etc. 48 See as an example of the New Approach Directive, Directive 2009/142/EC of the European Parliament and of the Council of 30 November 2009 relating to appliances burning gaseous fuels [2009] OJ L 330/10. 49 See Case C-112/97 Commission v Italy [1999] ECR I-1821; Case C-100/00 Commission v Italy [2001] ECR I-2785; Case C-103/01 Commission v Germany [2003] ECR I-5369. 50 Case 815/79 Cremonini and Vrankovich [1980] ECR 3583. 47
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recognition, one form of ex post recognition51. Although they do not set the required level of care, courts tend to consider compliance with technical standards as a minimum condition to escape liability in negligence.52 Thus, harmonized technical standards might potentially determine the floor standards concerning extra-contractual liability for defective products across the MS.53 Finally, technical standards are often a benchmark also in contracts between private parties, where they are being referred to as standards of performance.54 The New Approach has been subject to the criticism that it unjustifiably delegates regulatory power to private bodies insufficiently controlled by public authorities and lacking democratic governance.55 Moreover, the act of delegation has been criticized for being too vague.56 Despite this criticism, governance structures of the European standardization bodies are regulated to an extent that is hardly observable in other fields of private regulation or in reference to transnational public networks and other hybrid forms of regulation.57 2.3 Product Safety Outside Harmonized Standards Alongside the well-known European standardization bodies, another, less familiar, system of national-level private regulation of product safety has developed. As harmonized technical standards are voluntary only, manufacturers can decide to apply alternative methods in order to comply with the essential requirements. Given the relatively high costs of the European standards, alternative means of conforming to the essential requirements are frequently used by small- and medium-sized enterprises. The General Product Safety Directive (GPSD, 2001/95) requires that only safe products be placed on the market and renders MS responsible towards each 51
See Cafaggi, 2006c distinguishing between ex post judicial and administrative recognition of a privately produced standard and examining the legal and institutional implications. 52 See Spindler 1998; Falke and Schepel 2000; Schepel 2005, p. 343-349; Cafaggi 2009a. See also cases, for France: Cass Civ, 4 February 1976, Bull civ 1976, III No 49, 38; for UK: Board of Governors of the Hospital for Sick Children v McLaughlin & Harvey [1987] Con L R 25, 93; for Germany: judgment of the BGH of 12 November 1996, NJW 1987, 582. 53 Cafaggi 2009a, p. 21. However, courts sometimes release the defendant from liability also in cases of non-compliance with private technical standards; e.g., judgment of the BGH of 14 April 1994, NJW-RR 1994, 1196. For a critique of the lack of coordination between product safety and product liability regimes, see Cafaggi 2006a, 2009a. 54 E.g., BGH of 1 February 2005, X ZB 27/04 (2005) Neue Zeitschrift für Baurecht und Vergaberecht 290; OLG München of 12 September 2005, Verg 20/05, (2005) 8 Zeitschrift für deutsches und internationales Bau- und Vergaberecht 840. 55 E.g., Egan 1998. 56 Joerges, Schepel et al. 1999, 10ff. 57 Schepel 2005, 6. http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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other for achieving this goal.58 In order to secure the safety of products placed on the market—in other words to ensure that products meet the essential requirements—a surveillance system consisting of ex ante and ex post controls has been put in place. As a form of ex ante control, MS, independently from each other, put in place systems whereby third parties were entrusted to assess whether production lines used by manufacturers ensured that the final products conformed to the essential requirements. Types of conformity assessment bodies (CABs) varied widely among MS, as did the requirements they had to meet.59 In many instances MS relied on private regulators for this purpose and in order to ensure that they were able to provide the correct level of service, they were submitted to the control of national public authorities: the national accreditation bodies (NABs). Such a system was devised in each MS as a means to ensure an appropriate level of credibility for test results and product certification or inspection. Accredited CABs are an example of ex ante government-recognized private regulation. Private regulators are recognized ex ante by administrative acts. The accreditation system devised a complex network of public and private regulators whereby public regulators (accreditation bodies) certify private regulators (CABs) competent to attest production systems of manufacturers not applying the harmonized standards. Accreditation is the formal recognition by an approved accreditation body of the competence of organizations active in the field of conformity assessment—that is, certification bodies, inspectorates or laboratories—to perform specific activities. Principles of accreditation are covered by private international standards and guidelines (notably standard ISO/IEC 17000:2004), which set forth the requirements for both accreditation bodies and CABs seeking accreditation. However, the procedures followed by the NABs in certifying CABs varied widely among MS. As a result of this variety, the quality of work performed by the CABs varied widely among MS. Consequently, MS did not trust each other as to the safety of products manufactured in each others’ territories without the use of harmonized standards. This distrust led to the proliferation of additional checks and procedures for imported products. The Commission considered this situation to be detrimental to the functioning of the internal market. In order to remedy the situation, a package of legal instruments consisting of Regulation 764/2008, Regulation 765/2008 and Decision 768/2008 was put in
58
Recital 29 GPSD. Such transnational networks of national CABs may also have linkages back to the international rule-makers; see Büthe 2010a.
59
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place.60 Regulation 765/2008 introduced a broad range of rules dealing with accreditation and specifying requirements for accreditation bodies.61 According to Regulation 765/2008, each MS should appoint a single NAB or have recourse to the NAB of another MS.62 The Commission keeps a central register of all NABs.63 Regulation 765/2008 specifies that NABs should operate on a not-for-profit basis either as a public regulator or a recognized private regulator. In the latter case, accreditation tasks are to be delegated to a private accreditation body by public authorities. MS are further required to monitor their NABs on a regular basis in order to ensure that they fulfill conditions set by Regulation 765/2008.64 It follows that Regulation 765/2008 requires public authorities to have sufficient control over NABs. Furthermore, Regulation 765/2008 introduces the principle of non-competition among NABs themselves and among NABs on the one hand and CABs on the other.65 Regulation 765/2008 imposes on national accreditation bodies monitoring obligations in relation to CABs to which they have issued an accreditation certificate.66 The regulation also creates the legal basis for the network of national accreditation bodies and mandates each national accreditation body to participate in it.67 In this way, Regulation 765/2008 sets up a governance structure aimed at ensuring that decentralized national regulators promote legal (and economic) integration through cooperation of their activities. European co-operation for Accreditation (EA) is a non-profit association, which was set up in November 1997 and registered as an association in the Netherlands in June 2000. In the Framework Partnership Agreement signed 1 April 2009, EA was formally recognized as the official European accreditation infrastructure network.68 The agreement included General Guidelines for Cooperation between EA, the Commission, EFTA and national authorities,69 which are supposed to further increase mutual trust among the accreditation bodies in different MS.
60
For an overview see Gorywoda 2010. See Cafaggi 2009b. 62 Article 4(1) and 4(2) Regulation 765/2008. 63 Article 4(4) Regulation 765/2008. 64 Article 9(2) Regulation 765/2008. 65 Article 6(1) and 6(2) Regulation 765/2008. 66 Article 5(3) Regulation 765/2008. 67 Article 4(10) Regulation 765/2008. 68 See http://www.europeanaccreditation.org/content/home/docs/2010_Framework_Partnership_Agreement.pdf, accessed 19 September 2010. 69 The General Guidelines have been publishes in OJ in May 2009, 2009/C 116/04. 61
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2.4 Professionals In the field of professional services, there have been various forms of co-existence of public and private regulation ever since the Middle Ages.70 This is an example of a combination of industry- and expertise-based private regulation. Over time, private regulators at national level have grown in power, which has made the creation of transnational regulators difficult. As a result, private regulation in the field of professional services has followed softer modes of European integration. Here, we do not observe the far-reaching harmonization of rules, but rather the consolidation of systems of mutual recognition, exchange of information, mutual learning, benchmarking, and approximation of education systems.71 Moreover, the integrating role of private regulation in the field of professional services is a more open question, as in many instances it has rather promoted fragmentation. As it is the case for most countries outside of Europe as well, professional licensing in European MS is primarily delegated to the professions, which define access to entry criteria and monitoring system to ensure that basic requirements are met. Thus, the process of European legal integration necessarily concerning entry and licensing has to adopt techniques that coordinate private regulatory regimes in various MS. The mutual recognition of qualifications is a common integrating mechanism in the field of professional services.72 Accordingly, professionals licensed in one MS should, without additional burdens, be able to exercise their profession in another MS when the requirements are equal or equivalent. Admission to the profession in one MS is valid in all MS participating in the regime and represents a “single passport”. Mutual recognition has been the main integrating instrument employed by the European institutions.73 It has also been followed by private regulators. For instance, the Association of European Building Surveyors and Construction Experts (AEEBC) represents building surveyors and construction experts in Europe. Its major aim is to facilitate the free movement and recognition of professionals through the establishment of mechanisms for improved mutual recognition and mobility. The AEEBC aspires to develop a private framework for mutual recognition which would pre-empt any public European initiative in this respect. In the past, it has strongly objected to EU proposals for directives.74
70
Berman 1983; Brundage 2008. See Janczuk 2011. For an explanation when networked governance will be preferred over hierarchy in the transnational context but in relation to states see Kahler and Lake 2009, 242 ff. 72 See Janczuk 2011. 73 The most recent development in this respect has been the Services Directive, note 9 above. 74 Mole 2008. 71
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The mutual recognition of qualifications by private regulators is an example of coordination by decentralized private regulators at European level, which is complementary to the existing rules on the free movement of persons and services and reinforces their integrating power. In addition, the integrating value of mutual recognition systems is reinforced by the fact that mutual recognition is usually accompanied by some form of harmonization in the sense that some minimum standards have to be accepted by all participants to enable regulatory cooperation among private regulators.75 Another instrument of integration by private regulators is the harmonization of educational systems. Given that professional services are in many cases regulated at the MS-level and that the task of specifying what education is required to enter the profession is delegated to national private regulators, activities that harmonize education programs have the effect of approximating legal requirements concerning access to the profession. There are several such initiatives in Europe, for instance a minimum education program for real estate agents and property managers, “Eureduc,” developed by the Conseil européen des Professions immobilières (CEPI).76 Another variant of an integrating instrument focused on education is that of a certification system. Here, decentralized private regulators create a centralized private regulator whose task is to certify that particular education systems meet minimum requirements agreed on by the participating private regulators. A good illustration is provided by the title of “European Engineer” developed by the European Federation of National Engineering Associations (FEANI). FEANI attempts to certify, based on the duration and/or content of training, that an engineer has reached a certain level of professional competence.77 The first FEANI register was established in 1970, thus before the concept of mutual recognition had entered into European policy.78 This model moves beyond decentralized mutual recognition to combine a coordinating centralized body with decentralized national regulators. Note also that technical and professional standards are often combined. The European Committee for Standardization (CEN) has recently approved a
75
Black and Rouch 2008. For more information see CEPI 2010. 77 Seven years’ formation comprising education, training and experience, including a minimum of three years of engineering education at an institution recognized by FEANI and a minimum of two years of professional experience. Admittance to the FEANI Register of European Engineers is decided by the European Committee. European Engineers are required to comply with the FEANI Code of Conduct, which specifies basic ethics and professional standards; for more details see
. 78 It should be noted here that European engineering society via ORGALIME developed also standard form contracts and model contracts for the use in the EC. 76
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European standard for the services of real estate agents.79 The standard deals with terminology in the field, the obligation to provide information, the content of a contract with the customer, the managing of the task, liability insurance, information requirements for the agent, and good practice. The leading advocate for real estate market harmonization and integration and the upgrading of standards are the European Confederation of Real Estate Agents (CEI)80 and CEPI. The standard will represent a significant framework if the EU decides to harmonize services provision in the real estate field. For some MS, this standard will be a significant development in the field of regulation of real estate agents and an agent of legal integration because, whereas in some countries, this profession is regulated by law or by private regulators, in others there is no qualification structure at all.81 Another example of where private regulation has contributed to legal integration of professions in the EU are model construction contracts developed by the International Federation of Consulting Engineers (FIDIC).82 FIDIC created a model contract for the use of the European industry. Over time, FIDIC contracts have become a common way of contracting in the construction market. The use of common standard contract forms represents a different form of professional private regulation. Unlike the former examples, where the focus was on the ability of professionals to exercise their activity in other MS, in this example the private regulator generates common tools to be used among professionals and between them and third parties thereby integrating the market they operate in. This integrating effect has been further reinforced by the public regulator. The Commission required candidate states to award all construction contracts in the public procurement procedure using FIDIC model contracts.83 This is an example 79
CEN 2010. The standard concerns real estate agent understood as an entity (professional individual, partnership or company) who is acting as an agent in real estate transactions and real property assets on behalf of a client or as an intermediary. This may include, among others, the following activities: consulting (e.g., information of clients on market values of properties); purchase and sale; rental, letting, leasing; establishment, acquisition and registration of rights in real estate; surveying for housing and other type of buildings and land; marketing and advertising of properties; and drawing up contracts. 80 CEI 2009. 81 See Arruñada 2007; Schmid et al. 2007; ftp://ftp.cen.eu/CEN/AboutUs/Publications/Services.pdf, accessed 10 February 2010. 82 See www.fidic.org, accessed 1 December 2009. 83 See, e.g., European Commission—DG Regio—ISPA, “ISPA Manual: Working Document” (April 2002), available at http://ec.europa.eu/regional_policy/funds/download/manu_en.pdf, accessed 10 February 2010, 44. Lack of knowledge of FIDIC standards was frequently reported by the Commission as causing delays in the award of assistance, see, e.g., “An Evaluation of Phare Cross-Border Co-operation Programme Final Report (November 1998)” available at http://ec.europa.eu/europeaid/how/evaluation/evaluation_reports/reports/cards/951428_en.pdf, accessed 10 February 2010, 30, 44; or Special Report No 5/2003 concerning PHARE and ISPA Published by Berkeley Electronic Press, 2010
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of administrative recognition. By way of endorsement, the Commission promotes the use of standard contract forms and achieves indirectly but very effectively the legal integration of the market for public procurement. Thus, using financial assistance agreements with third parties, the Commission rendered private regulatory standards de facto binding rules for public procurements in countries that later joined the EC. This has substantially contributed to the prevalence of the FIDIC terms in new MS. As can be seen from the above examples, private regulators may have different identities: some are mainly composed of experts, others represent industry and, to a limited extent, consumers. In other cases, like the professionals, the two dimensions coincide: private regulators are at the same time experts and self-interested actors. There is an important difference between private regulation drafted by experts for the benefit of third parties (industry and consumers) and private regulation drafted by experts to regulate their own activities. They contribute in different ways to European legal integration. The two forms should lead to different accountability and governance requirements and should therefore be “regulated” separately. At the same time, these examples, while drawing on the distinction between expert- and interested-based regulation, show the difficulties of a clear-cut line between the two models. 3. Patterns of Legal Integration in the EU: The Role of Private Regulation Private regulation has recently begun to receive some significant academic attention. Legal scholarship on private regulation, however, has focused primarily on its regulatory effectiveness and only recently on legitimacy and accountability.84 Little or no attention has been paid to the role of private regulation in the European legal integration process. One of the primary forms of private regulation that we observe at the European level involves private organizations created to harmonize standards EUwide. This has occurred both via the creation of European technical standard setting bodies and industry-led organizations engaged in the process of (private) legislative harmonization. Second, increased European legal integration can occur when decentralized national private regulators coordinate their regulatory activities via agreements and codes of conduct, which bind the members of the organizations and by way of contracting can reach a large numbers of firms and consumers. Such coordination can take place through different means: agreements
funding of environmental projects in the candidate countries together with the Commission’s replies [2003] OJ C 167/1. 84 E.g., Knill and Lehmkuhl 2002 http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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and mutual recognition are among the most common.85 These two patterns may generate different types of integration: the former with a higher degree of stability but less propensity towards innovation, the latter on the contrary less stable but more suitable for change and innovation. and Classical integration theories, (neo-)functionalism86 87 intergovernmentalism, appreciated only the roles of supranational European institutions and national governments, respectively, as agents of the European integration. Other important integration drivers have been left out. Only the new forms of institutionalism, which developed from the neofunctionalist tradition, acknowledge that MS are increasingly willing to delegate policy implementation and coordination to new kinds of agents, including private actors. Within this framework however the Commission continues to perform a strategic function.88 A full recognition of private actors as drivers of integration becomes possible only within the conceptual framework of multi-level governance, which identifies a much wider range of actors and institutions involved at different levels in law and policy-making within the EU.89 Coordination among regimes, particularly negative integration, does also occur through judicial intervention. Specifically, private regulators have been empowered or disempowered by ECJ intervention. The literature on the role of the ECJ in European integration has long recognized private litigants as important players and leaders of policy and legal change through the ECJ’s judgments.90 This strand of literature acknowledges that private actors may have an interest in the pursuit of integration but also that they can create barriers to trade and free movements. Institutionalists have also argued that the interest of private actors in the proliferation of European rules and procedures increases with the deepening of integration and the corresponding increase of cross-border trade.91 Although the role of private regulation in European legal integration has not been systematically addressed in the existing literature, empirical evidence— such as presented in section 2 of this article—shows that private regulation does have an impact on the paths and structures of the European integration process.92 In fact, private regulation contributes to European legal integration in various ways, among which we distinguish two in particular.
85
See Cafaggi 2010. Haas 1964. 87 Moravcsik 1993. 88 Peterson 2006, 98f. 89 See, e.g., Kohler-Koch 1996; Marks, Hooghe et al. 1996; Pernice 2002. 90 Mattli and Slaughter 1995; Mattli and Slaughter 1998. 91 Fligstein and Stone Sweet 2002. 92 Note that private regulation may also, to some extent, result in legal disintegration. This effect is only partially addressed in this paper (section 3.d) and more systematically in Cafaggi 2010. 86
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3.1 Intentional vs. Incidental Private Harmonization Legal integration can be the main objective of private regulation or can take place as a byproduct of a regulatory process whose main objectives are different. In the former regime, legal integration is intentional; in the latter it is incidental. Among the forms of private regulatory regimes that intentionally pursue the goal of legal integration mutual recognition occupies an important position. Mutual recognition of different national standards, exchange of information, or benchmarking are the most widespread examples of structuring the cooperative interaction among private regulators so that it results in greater coordination. Mutual recognition is, moreover, usually accompanied by some form of harmonization of at least a floor or minimum standard.93 The main goal of private regulators is that of reaching a higher level of legal harmonization without losing their rule-making power.94 Intentional harmonization often entails centralization at the supranational level and development of various cooperative relationships. There are numerous examples of centralization at the supranational (i.e., European) level or EU-wide cooperation among private regulators, which show that centralization sometime involves establishing a new hierarchy, at other times purely coordination. The EPC and European technical standardization bodies are examples of central private regulators at the European level, which produce EU-wide rules and standards. Generally, the governance structure of private regulators affects the process of legal integration. Professionals in the EC have also established central private regulators whose aim, however, is often primarily to coordinate national private regulators, which remain the most relevant players. It is by way of these institutional developments that private regulators contribute to conventional legal integration through the harmonization of rules and standards. Unlike in the previous examples, there have been cases where private regulation mainly sought to address market failures but incidentally achieved partial or full harmonization. In the banking system, the enactment of a code of conduct on switching was mainly aimed at addressing asymmetry of market power and lack of competition. The commitment to ease switching banks contributed to broadening the choice for customers, thereby enhancing competition. The aim of enhancing competition could only be reached by adopting common rules of switching. The objective of a more competitive market for banking services was here achieved by way of private harmonization of contractual rules. 93 94
Black and Rouch 2008. See Janczuk 2011.
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On other occasions, decentralized private regulators have been seeking network legitimacy by adopting common rules of conduct applicable to all the regulators taking part in the regime.95 We discuss both types of private contributions to the process of European regulatory legal integration further below. 3.2 European Institutions and Private Interests as Drivers of Private Regulation Intentional European legal integration through private regulation has in many cases been consciously pursued by European institutions. When complementarity between public and private is strong, the likelihood that the conscious objective of legal integration influences the choices of instruments and objectives is rather significant. Previous analyses, however, have tended to explain EU support for private regulation merely as a function of the limited resources and competences of the EU and non-delegability doctrine.96 A strong concurring factor is the increased legitimacy and effectiveness that private regulation can lend to the process of legal integration. This objective, however, is severely undermined when only a small number of interested stakeholders is involved and the effectiveness of private regulation does not meet the expected benchmark. Following the institutional complementarity approach with private regulation, the EU wishes to increase its legitimacy, both towards MS and market players.97 Private regulation should not be seen as an alternative to public intervention, which reduces the power and legitimacy of the European Commission according to the deregulation approach. On the contrary, private regulation can, if well engineered, increase the legitimacy and effectiveness of the regulatory process and that of its leading orchestrator: the European Commission. The alliance between the EU and private actors means that MS seeking to challenge European rules would have to defy not only the Commission but also their own national interest groups, which considerably raises the costs of such an opposition for MS.98 At the same time, market players are more apt to accept rules when they have participated in their development. On the other hand, the 95
Legitimacy may be acquired in different ways. Membership to a network by each private regulator constitutes one way of being recognized as a regulator and share the reputation vis-a-vis other actors, both public and private with which the network of regulators engages. See Cafaggi 2010. 96 See Nölke and Graz 2008, 228ff. 97 For the idea that the use of private regulation by public authorities can be seen as either the source of legitimacy for private regulators, so-called downwards legitimacy, or as the recognition of limits of legitimate public regulation, so-called upward legitimacy see Prosser 2008, 241f. For the idea that co-regulation increases EU’s legitimacy see Verbruggen 2009. Complementarity is used here as defined and discussed by Cafaggi 2006a. 98 See Pollack 1997, 118. Published by Berkeley Electronic Press, 2010
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weaknesses of private regulation related to its limited representativeness, insufficiently open and transparent procedures, and lack of appropriate accountability mechanisms, can substantially undermine these goals. European institutions have indeed been the driving force behind the emergence of the EPC in the payment system and extensive harmonizing functions performed by the European technical standardization bodies. As pointed out earlier, it was only after the intervention of the European Commission in the form of Regulation 2560/2001 that the EPC was created. Furthermore, in order to support the SEPA Direct Debit, the European Regulation 924/2009 introduced the principle of reachability, meaning that banks offering direct debit services in Euro have to be reachable for cross-border direct debit transactions in Euro.99 The European technical standardization bodies became meaningful only after the launch of the New Approach and the delegation of substantial harmonizing powers to them. At the same time, both the EPC and European standardization bodies represent examples in which the single-stakeholder structure of the private regulators initially undermined the legitimacy of European-level rules and standards (see section 2.a). The Commission has made a substantial effort to open private rule-making procedures to more stakeholders, though the results have not been entirely satisfactory. The Commission has nonetheless continued to support private technical standard setting, we argue, because it has not just sought legitimacy for EU-wide regulations but has in many cases also consciously fostered private regulation as a tool to increase European legal (and economic) integration. It is certainly also true that private regulators have their own incentives for promoting legal integration within the EC. As much as they see the opportunities offered to them by the Community legal system when challenging national rules before the ECJ,100 private actors will also produce their own rules to benefit even further from the integrated market.101 Through a partnership with the EU (Commission), private regulators enhance their own powers within national legal systems. They are given legitimacy by participating in a European regulatory process led even informally by the European Commission. Professionals in the real estate market, for example, want to pre-empt European-level government regulation by developing a private European standard for the services of real 99
As of 1 November 2010 service providers in the eurozone that are reachable for a national direct debit transactions in euro, shall also be reachable, for direct debit transactions in euro initiated by a payee through a payment service provider located in any MS; Article 8(1)-8(3) Regulation 924/2009. For banks outside the eurozone, the deadline is set for 1 November 2014; Article 8(4) Regulation 924/2009. On the role of Regulation 924/2009 in the promotion of SEPA see Janczuk 2010. 100 Mattli and Slaughter 1995; Mattli and Slaughter 1998. 101 For the point that the supply of private regulation tends to be motivated by private rather than public gains, see Büthe 2010b. http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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estate agents. There is anecdotal as well as systematic empirical evidence for such behavior.102 The market structure and the degree of cross-border trade influence the incentives to increase private regulation. Integrated market with a significant number of cross border transactions are likely to generate regulatory processes aimed at harmonizing rules in order to decrease the costs of market integration. Thus, we should observe elaborate private harmonizing practices in the field of technical standardization and in the banking sector where the level of cross-border trade is relatively high, and only soft harmonizing practices in professional services, which are still strongly national-based. This is precisely what we find (see section 2).103 3.3 Private Regulators and Public Authority: The Contribution of Private Regulation to European Legal Integration Functional limitations of transnational private regulation104 can provide a reason for European private regulators to seek public support. We have seen a striking example in section 2: without the PSD and Regulation 924/2009, SEPA would be substantially hampered by legal variations across MS. Still, even in the presence of these two instruments, the EPC is seeking further regulatory support.105 Technical standardization is also heavily dependent on domestic arrangements. In order to become meaningful, harmonized European standards need to be transposed into national standards by national standardization bodies and the accreditation system is based on national CABs and NABs. European legislation often refers to private regulation more or less explicitly. In this case, centralized private regulation can complement European public regulation and reinforce its integrating scope. As another side of the same coin, this is yet another way in which European institutions can support private regulation in the EU. Apart from the well-known example of technical standardization, the Services Directive106 explicitly says that it is necessary to encourage professionals to draw up, in accordance with Community law, codes of conduct at Community level.107 Thus, we can expect intensified activity in the field of professional private regulation at the European level to ensue. In addition, if in a particular field there is no harmonization of laws at the European level but 102
Janczuk 2011. See also Janczuk 2011. 104 Nölke and Graz 2008. 105 Hartsink 2009a; Hartsink 2010. For further discussion of the need for public support to reinforce private regulation, see Vogel 2009, 151ff. 106 Directive 2006/123/EC of 12 December 2006 on services in the internal market. 107 Directive 2006/123/EC, Recitals 7, 100, 113, 114, 115 and Article 37. 103
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national laws independently refer to private regulation, private regulation can contribute to the harmonization of legal requirements in different MS by centralization, coordination of national bodies, or even regulatory competition. Different models of legal integration depend on the combination between mandatory and default rules in public legislation, which define the different scope and means of private regulation.108 When European public legislation is mainly mandatory, the role of private regulation is limited: it can only specify the content of mandatory rules or raise the standards defined.109 Mandatory rules can be specified in more detail by private regulators either through legislative instruments where private regulators publish their own rules specifying the content of public rules, or through regulatory instruments where private regulators assist market players in the implementation of public rules by defying sectorspecific rules, offering individual interpretative assistance or introducing cognitive intermediaries.110 In this way, private regulators operate as stabilizers of normative legal practice across the EU.111 As an example of the former, the public regulator of the financial sector in the UK, the Financial Services Authority (FSA), has opted for principles-based regulation, leaving to market participants the task of specifying the content and defining the appropriate remedies.112 In response, private regulators have undertaken the commitment to translate the
108
Mandatory rules are those that private parties have to comply with and can not deviate from. Default are rules which parties can exclude or modify. The different nature of the rules is typical of private law but can be applied also to private regulation. See Cafaggi 2007. 109 Black and Rouch 2008; Cafaggi 2009a, 15. See Recital 20 UCPD, note 14 above: “It is appropriate to provide a role for codes of conduct, which enable traders to apply the principles of this directive effectively in specific economic fields. In sectors where there are specific mandatory requirements regulating the behavior of traders, it is appropriate that these also will provide evidence as to the requirements of professional diligence in that sector. The control exercised by code owners at national or community level to eliminate unfair commercial practices may avoid the need for recourse to administrative or judicial action and should therefore be encouraged. With the aim of pursuing a high level of consumer protection, consumers’ organizations could be informed and involved in the drafting of codes of conduct.” Examples of private regulation raising standards can be found in the food industry. As an example, in 1993 the British Egg Industry Council (BEIC) has the Lion Code of Practice to reduce Salmonella in eggs throughout the food chain. The scheme sets standards significantly higher than those required by UK and EU law in areas including food safety, product quality, labeling, and animal welfare; see Fearne and Garcia Martinez 2005. 110 Cafaggi 2007. 111 Cf. de Búrca 2005, 318. 112 The Financial Services Authority, “Principles Based Regulation: Focusing on the Outcomes that Matter” (April 2007), available at http://www.fsa.gov.uk/pubs/other/principles.pdf, accessed 10 February 2010. See also Black, Hopper and Band 2007; Black 2008b. http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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principles set out by the FSA into more detailed rules in compliance with the general goals.113 When public legislation deploys default rules, private regulation can modify the standard as is the case with individual parties contracting away. Unlike the usual case, here it is collective private autonomy that contracts away public default rules.114 As an example, the EPC has elaborated a B2B version of the SEPA Direct Debit Rulebook where the refund right included in the Payment Services Directive has been modified.115 Another integrating instrument in the hands of private regulators in relation to default rules or where there is no public regulation, is that private regulation in the area of contract law (i.e. standard form contracts or model agreements) can facilitate contracting by creating a focal point or a private default rule tailored to the specified type of transaction. This was the idea behind the creation of the European Master Agreement for Financial Transactions.116 Contribution to European legal integration can also occur through horizontal cooperation among national private regulators in the implementation of European legislation. At the national level, European directives can be implemented by private regulation. If national private regulators cooperate with each other at the European level, the likelihood of consistent implementation increases. The possibility to delegate the implementation of European directives to private bodies is still a debated issue and is limited, but it can occur to some extent.117 A weaker form is when private regulators coordinate in order to lobby national legislators for a uniform implementation of European directives. In this way, the EPC has established a special working group devoted to the implementation of the PSD. Within this working group, members of national private regulators and market players coordinated their lobbying efforts aimed at uniform implementation of the directive.118 Finally, European integration through private regulation can occur not only through “private legislation” but also through judicial recognition.119 The judiciary frequently refers to private regulation. This is particularly the case in
113
Interview with member of the Banking Code Standards Board, London 31 October 2007; interview member of the British Bankers Association, 31 October 2007. 114 Cafaggi, 2009a, 2010. 115 SEPA Business to Business Direct Debit Scheme Rulebook v1.3, available at http://www.europeanpaymentscouncil.eu/knowledge_bank_detail.cfm?documents_id=306, accessed 10 February 2010. 116 Interview with member, European Banking Federation, Brussels, 23 July 2008. See Janczuk 2011. 117 See the role of EASA in the implementation of Directive 2005/29. 118 See Janczuk 2011. 119 Cafaggi 2006a; Cafaggi 2006b. Published by Berkeley Electronic Press, 2010
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reference to technical standards in tort and contract law litigation.120 But also standards concerning environmental protection, product safety, and professional due care defined by private associations contribute to the definition of liability and consequently to the formation of common core principles of European tort law. Recently, we also observe a growing tendency of the standardization bodies to generate standards for services, which basically deal with contract rules, whereas public harmonization of that field has not yet taken place.121 3.4 Private Regulation Fragmenting Markets: A Caveat As much as private regulation can contribute to legal integration it can also act as a partitioning factor. It must be recognized that the interests of private regulators might be either in the integration or fragmentation of the market. Which situation will occur depends mainly on the existing market structure and the potential effects of the private regulatory regime. First, national private regulators can promulgate rules in a decentralized manner leading to the differentiation of private rules to be met by market players in different jurisdictions. These will constitute barriers to entry and fragment the market, raising the costs of trans-border transactions. Second, private regulators can require that market players receive a license or are admitted to private regulatory bodies of a particular country in order to be allowed entry into its market. This would be possible where the public regulator delegates certain functions to private regulators and renders them the gatekeepers for market entry. In the European setting, this has been the case for professional services. Third, where admittance to private regulatory organizations is essential for market entry, private regulators can establish entry and exit barriers from such organizations inhibiting the autonomy of market players to switch the jurisdictions in which they are operating. The admissibility of this behavior may be scrutinized by competition law authorities. Without public delegation such a system can only work on the basis of mutual agreements where each national private regulator recognizes the authority of the other regulators in their own states. In theory, in a pure private system new regulators can emerge and individual members can switch so that no monopoly is granted. In practice, an agreement among existing private regulators will make the birth of new competing regulators very difficult. Finally, even a centralized private regulator can act as a disintegrating agent benefiting big enterprises at the expenses of SMEs. This will particularly be the case when the regulator raises standards for cross-border operation so that
120 121
For the examples see Spindler 1998; Cafaggi 2009a. See Janczuk 2011.
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only a few market players can comply with them.122 At the European level, the free movement provisions and competition rules can act as controls on private regulators' attempts to partition the market, as we discuss in more detail in the conclusion. 4. Conclusion: Increasing Legitimacy While Promoting Legal Integration? Private regulation has played a significant role in many European policy areas. The recognition of its relevance for European legal integration raises a whole set of questions concerning its relationship with the rule of law, democracy, its place in the constitutional design, legitimacy, and accountability123. Private regulation has been seen by the Commission as a tool to increase the EU’s legitimacy.124 But the increasing role of private regulators in European legal integration calls for stronger control over the exercise of their regulatory powers to ensure that adequate responsibilities accompany the growing powers. Instead, the rise of transnational private regulation has been accompanied by a lack of appropriate public measures to govern it.125 Private regulators are falling short of meeting the legitimacy standards of Western democracies. Mechanisms for rendering private regulators sufficiently accountable to the parties affected by their regulatory activities are lacking. In the case of private regulation, there is often no separation of powers between standard-setting, monitoring compliance, and enforcement functions, which is also a paradigm for public powers in modern democracies.126 In recent times, enforcement and to some degree monitoring have been outsourced to independent bodies to reduce the conflicts of interests. However, given that the contractual relationship with the outsourced body makes the monitor or the enforcer economically dependent upon the outsourcer, the separation of powers is often more formal than substantial.127 When performing their activities, both in the realm of pure private regulation and in that of public-private partnerships, particularly delegated private 122
This danger has been recognized by the European Parliament, see Manuel Medina Ortega, note 62 above: “Is of the opinion that standardisation and codes of conduct are important elements of self-regulation; considers, however, that standardisation must not lead to overregulation and hence constitute an additional burden for small and medium-sized enterprises in particular; believes, therefore, that the legal bases concerned should incorporate built-in safeguards against overregulation” (page 7). 123 See Black 2008 regarding regulation in general; in relation to private regulation specifically, see Cafaggi 2006 and Scott 2006. 124 Hüller and Kohler-Koch 2008; Altides and Kohler-Koch 2009. Generally, on the EU's legitimacy see, for instance, Scharpf 1999. 125 E.g., de Búrca 2008. 126 Cafaggi 2010. 127 See also the broader discussion of this issue by Starobin and Weinthal 2010. Published by Berkeley Electronic Press, 2010
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regulation and co-regulation, private regulators have to be accountable to different addressees.128 Given the "public relevance" of private rule-making, the issue of accountability goes beyond members of the organizations to involve the general public and affected parties. Levels and modes of accountability differ significantly when private regulators operate in either capacity. The influence of private regulation on legal integration within the EU implies that control mechanisms over its harmonizing or disintegrating value also need to be considered. In the remainder of this conclusion, we discuss available accountability mechanisms. The source of rule-making power has significant implications for the legitimacy of private regulators and available accountability mechanisms. Accountability mechanisms differ between those available to members of the group of rule-suppliers, generally the regulated entities, and those available to third parties. In the area of private regulation, where self-regulation is in place and the sources of regulatory power are based on the autonomy of rule-suppliers, without any delegation from government bodies, accountability mechanisms operate predominantly through governance devices ensuring members’ voice. Lower weight is attributed to exit, given that often, at least at national level, these organizations are monopolists.129 Third parties and public legislators are in a less advantageous position. Non-members can be given participatory rights to be heard, or rights to access documents and comment on proposals. They have at their disposal mainly mechanisms derived from the legal provisions controlling private regulation, such as mandatory contract law rules, competition rules, provisions on free movement, and fundamental rights. Indeed, we can observe an increasing role of procedural rights conferred to law-takers in relation to private regulation. In many cases, private regulators have created, upon informal pressure from the Commission or in compliance with legislative or regulatory requirements, rights for a broad range of stakeholders to be consulted or heard, or duties for the private regulator to give reasons for its rule-making choices.130 This has been the case, for instance, in the European standardization bodies where these new rights have emerged after the 2003 agreement with the EU Commission was signed. And in response to continuous requests by the Commission and the ECB,131 the EPC has developed fora for the consultation of a broader range of 128
On the relationship between accountability and legitimacy, see Black 2008a; Büthe 2010b. Distinction between voice and exit as accountability mechanisms has been offered by Hirschman 1970. 130 See Kingsbury, Krisch and Stewart 2005; de Búrca 2008. 131 E.g., “Consultative Paper on SEPA Incentives”, note 55 above; European Central Bank, “Towards a Single Euro Payments Area: Objectives and Deadlines. Fourth Progress Report” (February 2006), available at http://www.ecb.int/pub/pdf/other/singleeuropaymentsarea200602en.pdf, accessed 10 February 2010. 129
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stakeholders.132 These practices have transformed private regulation from a club good into a semi-public good.133 The semi public nature of private regulation is the outcome of a reduced degree of excludability of the benefits arising out of the private regime but also of more limited negative externalities. It is a combination of sword and shield. The potential beneficiaries have been given more voice (sword), those potentially negatively affected have been given higher legal protection (shield). However, these accountability measures are still idiosyncratic to specific regimes and thus cannot be considered to represent the common principles of private regulation in the EU.134 Judicial review of the decisions of private regulators operating in the sphere of pure self-regulation, which is based on the autonomy of the rule-suppliers and not related in any formal way to government delegation, is still limited and controversial. By contrast, in the case of delegated regulatory power, public bodies can ex ante formulate certain requirements, which private regulators must meet. These requirements can be specified in an outsourcing contract, legal provisions, or a grant. Compliance with them is definitely subject to judicial review thereby increasing ex post accountability Despite the prevalence of private regulation in the EU, no systematic body of law to control the exercise of power by private regulators has thus far developed. Nevertheless, certain areas of European rules apply to private 132
Customer Stakeholders Forum and Cards Stakeholders Group, see http://www.europeanpaymentscoun-cil.eu/content.cfm?page=what_is_epc, accessed 26 January 2010. However, the dialogue with customers and corporate is still not without problems, see for instance joint press release by several European associations representing consumers and corporate “SEPA risks failure unless corrections are made, say end users” (Brussels, 15 July 2009), available at http://www.ueapme.com/IMG/pdf/090715_EUC_joint_pr_FINAL.pdf, accessed 18 January 2010, or letter sent by The European Consumers’ Organisation (BEUC) to Members of European Parliament on 25 January 2010, available at www.euractiv.com/31/images/letterBEUC-SEPA_tcm31-189206.doc, accessed 26 January 2010. 133 Cafaggi 2010. 134 For instance, no procedural rights for stakeholders are observed in the private regulation of professional services. In addition, they usually concern only standard-setting process but not monitoring and enforcement (see Mattli and Woods 2009, 19f), as is the case for instance with SEPA. In addition, when participatory rights are formally awarded, they do not necessarily serve their function well, see for instance in relation to the European standardization bodies The Communication from the Commission to the European Parliament and the Council on the role of European standardisation in the framework of European policies and legislation COM(2004) 674 final (18 October 2004) and Council Conclusions of 20-21 December 2004 (“[The Council] noted that adequate participation in standardisation of all parties concerned (social partners, NGOs, environmental interest groups, consumers, SMEs, authorities etc.) is not sufficiently implemented at present within all Member States. European standardisation should be recognised as a strategic tool for competitiveness and for uniform application of technical legislation in the internal market. The commitment of everybody should be reactivated in this respect”; p. 7. For a proposal to establish general framework rules for private regulation, see Cafaggi 2010. Published by Berkeley Electronic Press, 2010
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regulation and can be considered as control mechanisms. In addition, private regulation is controlled at the national level when EU legislation makes specific reference to private regulation. This, however, is not entirely satisfactory as it can disturb the harmonizing effect of private regulation and lead to fragmentation when divergences among the MS exist. European law deals with private regulation primarily through competition law, fundamental freedoms, and fundamental rights. In addition, in certain sectors, the secondary law is directing private regulatory arrangements. As a result, private regulatory arrangements are subject to various legal requirements, sometimes being deeply regulated, and sometimes remaining out of reach for the main regulatory tools. Competition law provisions prevent monopolization and/or abuse of regulatory power. Historically, the primary original goal of the competition rules was to prevent private actors from restoring the national divisions in trade between MS.135 This explanation was referred to in the early case law of the ECJ136 and has recently reappeared in the ECJ’s reasoning.137 However, competition law has also been employed as an instrument to ensure the plurality of private regulators and to make private regulators modify their governance structures in order to make them more open and participatory.138 Guidelines on the application of Article 81 to horizontal agreements139 explicitly release from the competition law restrictions those private standard-setting organizations in which participation is unrestricted and transparent, which set no obligation to comply with the standard, and are based on non-discriminatory, open and transparent procedures.140 Market participants must also remain free to develop alternative standards or products that do not comply with the standard produced by a particular private regulator.141 Fundamental freedoms have been applied by the ECJ so as to prevent fragmentation of the market by private regulators. In particular, the ECJ has been applying the principle of free movement of persons (Articles 39 and 43 EC) and 135
Spaak Report (Rapport des Chefs de Délégation aux Ministres des Affaires Etrangères, Bruxelles, 1956), 16. 136 Joined Cases 56 & 58-64 Consten and Grundig v. Commission [1966] ECR 299. 137 Joined Cases C-468/06 to C-478/06 Sot. Lelos kai Sia EE and others v. GlaxoSmithKline AEVE Farmakeftikon Proionton, formerly Glaxowellcome AEVE [2008] ECR I- 7139. 138 On the role of competitive market structure of private regulators for their legitimacy see Ogus 1995, 102ff.; Cafaggi 2006c, 40ff.; Scott 2006, 141-43; Scott 2008, 267. For an analysis of the conditions necessary for effective competition among private regulators see Barbou Des Places 2006, 215ff. 139 Commission Notice—Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements [2001] OJ C 3/2. 140 Commission Notice … [2001] OJ C 3/2, par. 155. 141 Commission Notice … [2001] OJ C 3/2, par. 159. http://www.bepress.com/bap/vol12/iss3/art6 DOI: 10.2202/1469-3569.1320
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of free movement of services (Article 49 EC) in relation to private rule-making.142 There is a settled case law stating that private regulation cannot reinstate barriers to free movement.143 Importantly, even reference to the fundamental rights as the normative ground of private regulation will not exclude application of the fundamental freedoms. The fundamental rights, in turn, have found their way towards shaping and directing private regulation through the so-called horizontal effect.144 However, due to the specific nature of the European legal order, fundamental rights have been applied towards private actors mainly at the national level and not by the ECJ.145 Control by way of general principles is only one set of tools. Governance devices provide additional legitimacy-enhancing mechanisms.146 One of the most significant is related to the division of tasks among different actors within the regulatory process. If we look at the division of powers during various stages of the regulatory process the tasks of standard-setting, monitoring, and enforcement can be assigned to different regulators, either public or private.147 By having real independent monitors and enforcers, private regulators decrease conflicts of interest and increase the credibility of law making. One more mechanism to enhance legitimacy is to promote public oversight by designing different cooperative models between public and private.148 Regulatory power within a certain stage of the regulatory process may be shared by more than one actor, either public or private or both. Private regulators can, for instance, regulate in greater detail issues that are already regulated by public regulation,149 or regulate another layer of the legal institution that is already regulated by public regulation.150 In addition, when regulatory power is shared by public and private regulators, it can be coordinated through hierarchy, cooperation, and/or competition. Finally, the federal-like EU institutional setting adds to the complexity of allocating regulatory powers between the national and European levels. Here, it 142
Free movement of goods (Article 28 EC) has been more controversial. Cf., Case 58/80 Dansk Supermarked (1981) ECR 181; Case 311/85 Vlaamse Reisbureaus (1987) ECR 3801; and Case C112/00 Schmidberger [2003] ECR I-05659. 143 See above in this paper. 144 See, for instance, Friedmann and Barak-Erez 2001; Cherednychenko 2007; Mak 2008; Brüggemeier, Colombi Ciacchi and Comandé 2010. 145 E.g., Trib. Milano, ord. 30.03.1994, [1994] I Foro It. 1572. 146 Cafaggi 2006; 2010. 147 See Büthe 2010a. 148 See Freeman 2000; 2003; Freeman and Minow 2009. 149 See Black and Rouch 2008; this is for instance the case with regard to technical standardization in Europe, see section 2.b of this paper. 150 This is for instance the case for SEPA. Published by Berkeley Electronic Press, 2010
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should particularly be noticed that private regulators operate both at the European and national levels, and we do not observe a perfect symmetry between the origin of the organization (national or European) and its territorial domain of activity. The role of private regulation in European legal integration deserves more scholarly and institutional attention. Both its framework and consequences have to be investigated further in order to assess the costs and benefits, and specifically the impact on the construction of a European identity, which can unite respecting diversities. In order to address the legitimacy-related problems of private regulation and not undermine its integrating value, European-level principles governing private regulation should be developed.151 References Altides, Christina and Beate Kohler-Koch. 2009. “Multi-level Accountability via Civil Society Associations?” Paper presented at the conference Bringing Civil Society In: The European Union and the rise of representative democracy (March 13-14), Florence, Italy. Arruñada, Benito. 2007. “Market and Institutional Determinants in the Regulation of Conveyancers.” European Journal of Law and Economics 23 (2): 93116. Barbou Des Places, Ségolène. 2006. “Self-Regulation and the Professions: A Perspective from Regulation Theory.” In Reframing Self-Regulation in European Private Law, edited by Fabrizio Cafaggi. The Netherlands: Kluwer Law International. Basedow, Jürgen. 2008. “The State’s Private Law And The Economy: Commercial Law As An Amalgam Of Public And Private Rule-Making.” American Journal of Comparative Law 56 (3): 703-722. Berman, Harold Joseph. 1983. Law and Revolution: The Formation of the Western Legal Tradition. Cambridge: Harvard University Press. Black, Julia. 2008a. “Constructing and contesting legitimacy and accountability in polycentric regulatory regimes.” Regulation and Governance 2 (2): 13764. Black, Julia. 2008b. “Forms and Paradoxes of Principles-based Regulation.” Capital Markets Law Journal 3 (4): 425—57. Black, Julia, Martyn Hopper and Christa Band. 2007. “Making a Success of Principles-based Regulation.” Law and Financial Markets Review 1 (3): 191-206.
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For such a proposal see Cafaggi 2009a.
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Cutler Claire. 2010. “The Legitimacy of Private Transnational Governance: Experts and the Transnational Market for Force.” Socio-Economic Review 8 (1): 157-85. de Búrca, Graine. 2005. “Rethinking Law in Neofunctionalist Theory.” Journal of European Public Policy 12 (2): 310-26. de Búrca, Graine. 2008. “Developing Democracy Beyond the State.” Columbia Journal of Transnational Law 46 (2): 221-78. de Búrca, Graine and Paul Craig. 2007. EU Law: Text, Cases and Materials, 4th edition. Oxford: Oxford University Press. de Búrca, Graine and Joanne Scott eds. 2006. Law and New Governance in the EU and the US. Oxford: Hart Publishing. Egan, Michelle P. 1998. “Regulatory Strategies, Delegation and European Market Integration.” Journal of European Public Policy 5 (3): 485-506. Egan, Michelle P. 2001. Constructing a European Market: Standards, Regulation, and Governance. Oxford: Oxford University Press. Elliott, Donald E., Bruce A. Ackerman, et al. 1985. “Toward a Theory of Statutory Evolution: The Federalization of Environmental Law.” Journal of Law, Economics and Organization 1 (2): 313. Falke, Josef and Harm Schepel. 2000. Legal Aspects of Standardisation in the Member States of the EC and EFTA. Luxembourg: Office for Official Publications of the European Communities. Fearne, Andrew and Marian Garcia Martinez. 2005. “Opportunities for the Coregulation of Food Safety: Insights from the United Kingdom.” 20 (2) Choices 109-16. Fligstein, Neil and Alec Stone Sweet. 2002. “Constructing Polities and Markets: An Institutionalist Account of European Integration.” American Journal of Sociology 107 (5): 1206-43. Freeman, Jody. 2000. “The Private Role in Public Governance.” New York University Law Review 75 (3): 543-675. Freeman, Jody. 2003. “Extending Public Law Norms through Privatization.” Harvard Law Review 116 (5): 1285-1352. Freeman, Jody and Martha Minow eds. 2009. Government by Contract. Outsourcing and American Democracy, Cambridge: Harvard University Press. Friedmann, Daniel and Daphne Barak-Erez eds. 2001. Human Rights in Private Law. Oxford: Hart Publishing. Furner, Mary O. 2010. “From ‘State Interference’ to the ‘Return to the Market’: The Rhetoric of Economic Regulation from the Old Gilded Age to the New.” In Government and Markets: Toward A New Theory of Regulation, edited by Edward J. Balleisen and David Moss. New York: Cambridge University Press.
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Gorywoda, Lukasz. 2010. “The New European Legislative Framework For The Marketing Of Goods.” Columbia Journal of European Law 16 (1): 161-9. Haas, Ernst B. 1964. Beyond the Nation State. Stanford: Stanford University Press. Hadfield, Gillian K. . 2009. “The Role of International Law Firms and Multijural Legal Human Capital in the Harmonization of Legal Regimes.” In Multijuralism: Manifestations, Causes and Consequences, edited by A. Breton, A. Des Ormeaux, K. Pistor and P. Salmon. Surrey: Ashgate. Hartsink, Gerard. 2009a. “SEPA Only: The EPC Vision EPC Recommendations on End Date for SEPA Migration.” EPC Newsletter 2 (April). Hartsink, Gerard. 2009b. “Self-regulation and Regulation in the Payments and Securities Industry: An EU Perspective.” Paper presented at the conference Globalisation, the Nation-State and Private Actors: Rethinking Public-Private Cooperation in Shaping Law and Governance (October 8-9), The Hague, The Netherlands. Hartsink, Gerard. 2010. “On Payments and Light Bulbs: Commission ready to write off SEPA via EU legislation?” EPC Newsletter 7 (July 2010). Hirschman, Albert O. 1970. Exit, Voice and Loyalty. Responses to Decline in Firms, Organizations and States. Cambridge, Mass.: Harvard University Press. Hüller, Thorsten and Beate Kohler-Koch. 2008. “Assessing the Democratic Value of Civil Society Engagement in the European Union.” In Opening EUGovernance to Civil Society: Gains and Challenges (CONNEX Report Series No 05), edited by Beate Kohler-Koch, Dirk De Bièvre and William Maloney. Mannheim: Mannheim Centre for European Social Research. Hutter, Bridget M. 2006. “The Role of Non-State Actors in Regulation.” In Global Governance and the Role of Non-State Actors, edited by Gunnar Folke Schuppert. Berlin: Nomos. Janczuk, Agnieszka. 2010. “Single Payments Area in Europe.” Columbia Journal of European Law 16 (2): 321-35. Janczuk, Agnieszka. 2011. Private Regulation and European Integration: Functions, Techniques and Impact. General and Sectoral Analysis. Ph.D. diss., European University Institute, Florence, forthcoming. Joerges, Christian, Harm Schepel and Ellen Vos. 1999. “The Law’s Problems with the Involvement of Non-governmental Actors in Europe’s Legislative Processes: The Case of Standardisation under the “New Approach”. Working Paper 99/9. Florence: European University Institute. Jordana, Jacint, and David Levi-Faur eds. 2004. The Politics of Regulation: Institutions and Regulatory Reforms of the Age of Governance. Northampton, MA: Edward Elgar Publishing.
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Kahan, Marcel and Michael Klausner. 1996. “Path Dependence in Corporate Contracting: Increasing Returns, Herd Behavior and Cognitive Biases.” Washington University Law Quarterly 74 (2): 347-66. Kahler, Miles and David Lake, A. 2009. “Economic Integration and Global Governance: Why So Little Supranationalism?” In The Politics of Global Regulation, edited by Walter Mattli and Ngaire Woods. Princeton: Princeton University Press. Kingsbury, Benedict, Nico Krisch and Richard B. Stewart. 2005. “The Emergence of Global Administrative Law.” Law and Contemporary Problems 68 (34): 15-61. Klausner, Michael. 1995. “Corporations, Corporate Law, And Networks Of Contracts.” Virginia Law Review 81: 757-852. Knill, Christoph and Dirk Lehmkuhl. 2002. “Private Actors and the State: Internationalization and Changing Patterns of Governance.” Governance 5 (1): 41-64. Kohler-Koch, Beate. 1996. “Catching up with change: The transformation of governance in the European Union.” Journal of European Public Policy 3 (3): 359-80. Levi-Faur, David. 2005. “The Global Diffusion of Regulatory Capitalism” The Annals of the American Academy of Political and Social Science 598 (1): 12-32. Majone, Giandomenico. 2005. Dilemmas of European Integration: The Ambiguities and Pitfalls of Integration by Stealth. Oxford: Oxford University Press. Mak, Chantal. 2008. Fundamental Rights in European Contract Law: A Comparison of the Impact of Fundamental Rights on Contractual Relationships in Germany, the Netherlands, Italy and England. Alphen aan den Rijn: Kluwer Law International. Marks, Gary, Liesbet Hooghe and Kermit Blank. 1996. “European Integration since the 1980s. State-Centric versus Multi-Level Governance.” Journal of Common Market Studies 34 (4): 341-78. Mattli, Walter, and Tim Büthe. 2005. “Global Private Governance: Lessons From a National Model of Setting Standards in Accounting.” Law and Contemporary Problems 68 (3/4): 225-262. Mattli, Walter and Anne-Marie Slaughter. 1995. “Law and Politics in the European Union: A Reply to Garrett.” International Organization 49 (1): 183-90. Mattli, Walter and Anne-Marie Slaughter. 1998. “Revisiting the European Court of Justice.” International Organization 52 (1): 177-209.
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Mattli, Walter and Ngaire Woods. 2009. “In Whose Benefit? Explaining Regulatory Change in Global Politics.” In The Politics of Global Regulation, edited by Walter Mattli and Ngaire Woods. Princeton: Princeton University Press. Michaels, Ralf. 2007. “The True Lex Mercatoria: Law Beyond the State.” Indiana Journal of Global Legal Studies 14 (2): 447-68. Michaels, Ralf and Nils Jansen. 2006. “Private Law Beyond the State? Europeanization, Globalization, Privatization.” American Journal of Comparative Law 54 (4): 843-90. Minow, Martha L. ed. 2002. Partners, Not Rivals: Privatization and the Public Good. Boston: Beacon Press. Mole, Trevor. 2008. “Professional Qualification and Recognition.” Speech by the President of the Association of European Building Surveyors and Construction Experts (AEEBC) at the presentation of two projects funded by the EU under the Leonardo da Vinci framework, Warsaw University of Technology, 18 April 2008. http://www.aeebc.org/uk/news.asp?newsid=26 (last accessed 19 September 2010). Moravcsik, Andrew. 1993. “Preferences and Power in the European Community: A Liberal Intergovernmentalist Approach.” Journal of Common Market Studies 31 (4): 473-524. Nölke, Andreas and Jean-Christophe Graz. 2008. “The Limits of Transnational Private Governance.” In Transnational Private Governance and its Limits, edited by Andreas Nölke and Jean-Christophe Graz. Abingdon: Routledge. Novak, William J. 2009. “Public-Private Governance: An Historical Introduction.” In Government by Contract: Outsourcing and American Democracy, edited by Jody Freeman and Martha Minow. Cambridge, Mass.: Harvard University Press. Ogus, Anthony. 1995. “Rethinking Self-Regulation.” Oxford Journal Legal Studies 15 (1): 97-108. Pernice, Ingolf. 2002. “Multilevel Constitutionalism in The European Union.” European Law Review 27 (5): 511-29. Peterson, John. 2006. “The College of Commissioners.” In The institutions of the European Union, edited by John Peterson and Michael Shackleton. Oxford: Oxford University Press. Pollack, Mark. 1997. “Delegation, Agency, and Agenda Setting in the European Community.” International Organization 51 (1): 99-134. Prosser, Tony. 2008. “Regulatory Agencies, Regulatory Legitimacy, and European Private Law.” In Making European Private Law: Governance Design, edited by Fabrizio Cafaggi and Horatia Muir Watt. Cheltenham: Edward Elgar.
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Sabel, Charles F. and Jonathan Zeitlin. 2008. “Learning from Difference: the New Architecture of Experimentalist Governance in the European Union.” European Law Journal 14 (3): 271-327. Scharpf, Fritz W. 1999. Governing in Europe: Effective and Democratic?. Oxford: Oxford University Press. Schepel, Harm. 2005. The Constitution of Private Governance: Product Standards in the Regulation of Integrating Markets. Oxford: Hart Publishing. Schmid, Christoph U., Steffen Sebastian, Marcel Fink and Iain Paterson, “Study COMP/2006/D3/003: Conveyancing Services Market” (December 2007), http://ec.europa.eu/competition/sectors/professional_services/studies/csm_ study_complete.pdf. Schuck, Manfred and Benjamin Syrbe. 2008. “The Impact of SEPA on Domestic Markets and the Future for Emerging Pan-European Infrastructures.” Journal of Payments Strategy and Systems 2 (4): 370-83. Scott, Colin. 2006. “Self-Regulation and the Meta-Regulatory State.” In Reframing Self-Regulation in European Private Law, edited by Fabrizio Cafaggi. The Netherlands: Kluwer Law International. Scott, Colin. 2008. “Regulating Private Legislation.” In Making European Private Law: Governance Design, edited by Fabrizio Cafaggi. Cheltenham: Edward Elgar. Scott, Colin. 2009. “Governing Without Law or Governing Without Government? New-ish Governance and the Legitimacy of the EU.” European Law Journal 15 (2): 160-73. Scott, Joanne and David M. Trubek. 2002. “Mind the Gap: Law and New Approaches to Governance in the European Union.” European Law Journal 8 (1): 1-18. Spindler, Gerald. 1998. “Market Processes, Standardisation, and Tort Law.” European Law Journal 4 (3): 316-36. Spindler, Gerald. 2009. “Interaction between Product Liability and Regulation at the European Level.” In The Regulatory Function of European Private Law, edited by Fabrizio Cafaggi. Cheltenham: Edward Elgar. Starobin, Shana and Erika Weinthal. 2010. “The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label.” Business and Politics 12(3). van der Zeijden, Paul and Rob van der Horst. 2008. „Self-Regulation Practices in SANCO Policy Areas: Final Report.” http://ec.europa.eu/dgs/health_consumer/self_regulation/docs/self-regSANCO-final.pdf (last accessed 19 September 2010).
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Van Waarden, Franz. 2008. “Where to Find a ‘Demos’ for Controlling Global Risk Regulators?” In Transnational Private Governance and its Limits, edited by Jean-Christophe Graz and Andreas Nölke. Abingdon: Routledge. Verbruggen, Paul. 2009. “Does Co-Regulation Strengthen EU Legitimacy?“ European Law Journal 15 (4): 425-41. Vogel, Steven K. 1996. Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries. Ithaca, NY: Cornell University Press. Vogel, David. 2009. “The Private Regulation of Global Corporate Conduct.” In The Politics of Global Regulation, edited by Walter Mattli and Ngaire Woods. Princeton: Princeton University Press. Vos, Ellen. 1999. Institutional Frameworks of Community Health and Safety Legislation: Committees, Agencies, and Private Bodies. Oxford: Hart Publishing. Weatherill, Stephen, Ed. (2007). Better Regulation. Oxford, Hart Publishing.
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Article 7
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Transnational Private Regulation in Practice: The Limits of Forest and Labor Standards Certification in Indonesia Tim Bartley, Indiana University
Recommended Citation: Bartley, Tim (2010) "Transnational Private Regulation in Practice: The Limits of Forest and Labor Standards Certification in Indonesia," Business and Politics: Vol. 12 : Iss. 3, Article 7. Available at: http://www.bepress.com/bap/vol12/iss3/art7 DOI: 10.2202/1469-3569.1321 ©2010 Berkeley Electronic Press. All rights reserved.
Transnational Private Regulation in Practice: The Limits of Forest and Labor Standards Certification in Indonesia Tim Bartley
Abstract Systems for certifying sustainable resource use and decent labor conditions have become prominent modes of private regulation at the transnational level. But serious questions remain about how these global standards are put into practice in particular places, especially in developing countries. Drawing on fieldwork in Indonesia, this paper examines the growth of certification of sustainable forestry (e.g., through the Forest Stewardship Council) and certification of decent labor conditions in factories (e.g., through Social Accountability International). Based on the controversy that surrounded both sweatshops and deforestation in Indonesia, and the export dependence of both the apparel/footwear and forest products sectors, these would appear to be prime candidates for the application of certification. Yet in both sectors, the growth of multistakeholder certification has been limited. Furthermore, private regulation in Indonesia has taken somewhat divergent paths in these two sectors, which shapes certification’s significance at the point of production. The paper examines how the socio-legal context of certification, the character of supply chain relationships, and possible differences in the politics of labor and the environment can help to explain these patterns and contribute to a richer sense of private regulation’s “on the ground” manifestations. KEYWORDS: regulation Author Notes: Tim Bartley is Associate Professor of Sociology at Indiana UniversityBloomington (www.indiana.edu/~tbsoc). He can be reached via email at
[email protected]. For helpful comments on previous versions of this paper, he thanks Layna Mosley, Jared Woollacott, Tim Büthe, the anonymous reviewers, participants at the Duke Workshop on Private Regulation in the Global Economy, and audience members at the Department of Geography colloquium series at Indiana University. Also helpful were comments on a related paper presented at the workshop on Comparing Transnational Standard Setting on Labour and Environmental Issues at the Max Planck Institute for the Study of Societies. In addition, he thanks numerous individuals who helped develop and expand contacts in Indonesia, especially Teri Caraway, Hari Nugroho, Surya Tjandra, Peter Sprang, and various scholars at the Center for International Forestry Research (CIFOR). This research was funded in part by the American Sociological Association’s Fund for the Advancement of the Discipline Award supported by the American Sociological Association and the National Science Foundation.
Bartley: Transnational Private Regulation in Practice
1. Introduction The global economy is increasingly layered with standards, covering issues from accounting procedures to human rights. Private-sector coalitions of NGOs and companies have often taken on the role of developing, monitoring, and enforcing standards for business—a task previously reserved mainly for the state. Such initiatives have emerged so rapidly and broadly that some scholars have heralded the rise of an “NGO-Industrial Complex”1 and distinct new “fields of transnational governance.”2 While some standards seek primarily to coordinate global trade,3 many purport to promote ecological sustainability and social justice or to institutionalize “corporate social responsibility” (CSR). These include labor standards developed in the wake of sweatshop and child labor scandals, environmental standards for pollution control or sustainable forestry, and systems for certifying Fair Trade or sustainable coffee and produce, to name just a few. The growing body of research on “transnational private regulation”4 or “civil regulation”5 of labor and the environment has too often limited itself to examining negotiations among firms, NGOs, and governments in affluent countries, leaving the on-the-ground application of the resulting standards and monitoring systems as something of a black box, especially in developing countries. In some instances, scholars imply that local conditions do not matter, by talking about private regulatory initiatives as transcendent—that is, forms of authority that transcend or bypass older forms of governance and express moral distinctions on the global stage.6 In other instances, scholars argue that the effects of private regulatory systems can be read off of their principles of design in a fairly straightforward way.7 In either case, the process of turning standards “on paper” into practice “on the ground” remains a black box. As a way to begin prying open this black box, I conceptualize certification as a chain of demands and assurances, by which rules and enforcement activities pass through a variety of actors and locations.8 The links in this chain are more extensive than suggested by a simple image of one party certifying another. Demands from consumers and retailers in affluent countries often sit at one end of this chain, while workers, communities, and ecosystems in developing countries often sit at the other end. In between are a variety of actors offering assurances 1
Gereffi, Garcia-Johnson, and Sasser 2001. Djelic and Sahlin-Andersson 2006. 3 Loya and Boli 1999; Mattli and Büthe 2003. 4 Bartley 2007. 5 Vogel 2005. 6 Boli 2006; Loya and Boli 1999. 7 Potoski and Prakash 2009. 8 Thanks to Tim Büthe for suggesting this direction. 2
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that a demand for standards is being met, including certification associations (e.g., Forest Stewardship Council, Social Accountability International), accredited auditors/certifiers (e.g., Rainforest Alliance, SGS, Bureau Veritas), compliance consultants (including both industry- and NGO-sponsored consultancies), production firms, and sub-contractors/suppliers. In general, we know more about the “top” of this chain—that is, demands from consumers, retailers, and the construction of certification programs—than we do about the “bottom” of it, especially in developing countries.9 While the chain is transnational in scope, it is also embedded in domestic settings in important ways. Domestic structures and configurations of power can frustrate, amplify, or distort the application of standards in particular places, as some researchers have begun to demonstrate. Ponte’s work on sustainable fisheries certification in South Africa finds that certification was appropriated by white-owned fishing groups to maintain market control and exclude black-owned companies.10 Seidman’s research argues that independent monitoring of factories in Guatemala and carpet mills in India is severely constrained by the entrenched power of industry and government elites.11 The application of certification standards does not bypass or trump the state, though it may insert rules and actors that intersect with state statutes in novel ways. Conceptualizing certification as a chain of demands and assurances denotes that it is not merely a mode of governing supply chains—it is itself a chain of events and actors. In this way, the concept bears some resemblance to Vandenbergh’s idea of “private environmental contracting” where requirements for environmental performance are required by retailers and communicated down a supply chain;12 as well as to some work using Actor-Network Theory to understand global governance.13 It resonates with Abbott and Snidal’s “regulatory standard-setting process,”14 though it is more geared toward unpacking some of their stages (implementation, monitoring, and enforcement) than encompassing others (agenda setting, negotiation of standards). The point is not to coin another term for certification and other forms of private regulation, but to suggest a framework that sensitizes one to the processes involved in translating a demand for standards into practice in a particular place. The goal of this paper is to examine the extent to which private regulatory standards in two arenas—forestry and apparel—have been put into practice in one political setting—Indonesia. Whereas most previous studies focus on a single 9
For notable exceptions, see Seidman 2007, Ponte 2008, and Espach 2009. Ponte 2008. 11 Seidman 2007. 12 Vandenbergh 2007. 13 See Riles 2000. 14 Abbott and Snidal 2009. 10
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domain (i.e., labor, forestry, fisheries) in a particular country, I seek breadth and analytical leverage by considering two domains. Indonesia is an important site for research on both labor standards and forestry. It has large export-oriented manufacturing sectors (e.g., garments, footwear, furniture), the fourth largest labor force (behind China, India, and the U.S.) and the third largest tropical forest area (behind Brazil and the Congo) in the world. Furthermore, since the fall of the New Order Suharto regime and the democratization of the polity, Indonesia has become an especially dynamic environment, which international observers have viewed as both a promising moderate Islamic democracy and a site of rising inequality and persistent corruption. Indonesia’s burgeoning but highly fragmented trade union movement and its high degree of capital mobility (both within and outside the country) have captured the attention of labor scholars.15 For scholars of the environment and development, rapid rates of deforestation, clearing of forests for agriculture (including biofuels), and high profile environmental scandals (particularly in the mining industry) in Indonesia have garnered attention from across the disciplinary spectrum.16 My analysis draws on 47 interviews with representatives of NGOs, companies, trade unions, and certifiers/auditors working in Indonesia, as well as informal conversations with dozens of other individuals working in this field and various secondary sources. All interviews were conducted in Java or East Kalimantan in 2008 or 2009, either in English or in Bahasa Indonesia with the assistance of interpreters. I proceed in several steps. I begin by discussing common predictions about the growth of certification and then apply them to the Indonesian forestry and apparel/footwear sectors. Next, I use information on the growth of forestry and labor standards certification in Indonesia to partially assess these predictions. Finding some patterns not well anticipated by prior analyses, I then explore several avenues for solving these puzzles and conclude with an agenda for pushing the analysis further.
2. Conditions for the Growth of Certification in Producer Countries Much of the existing literature argues that third party certification systems can be an effective response to criticism of conditions in global supply chains, especially given the tendency of firms to shirk responsibilities for improvement when
15 16
Caraway 2006a; Robison and Hadiz 2004. Curran et al 2003; Tsing 2005.
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voluntary standards lack enforcement or external monitoring.17 Although scholars have paid far more attention to the design and construction of private regulatory initiatives than to their uptake and consequences, the existing literature is not without statements that can guide such an inquiry. In particular, scholars have begun to identify conditions under which certification initiatives are likely to take hold in a given country or region. I consider the two most common of these conditions below. Note, however, that the literature often conflates the presence of private regulatory systems in particular settings with significant on-the-ground consequences, or in some instances, even “transformation” of the conditions of production. This is a questionable conflation, since the process of translating global standards into local practices may involve adaptations that water down the significance of a standard, and since the growth of comparatively weak systems may give the impression of change with little behind it. My data on labor and forestry in Indonesia contains evidence of each of these dynamics, suggesting that more than numbers of certified sites are necessary to truly judge the consequences of private regulation.
2.1 Two Major Factors: Controversy and Export Dependence One condition stressed throughout the literature is the existence of public controversy and international attention to dramatic instances of exploitation. In general, social scientists have argued that public controversy and legitimacy crises open windows for the growth of regulatory standards,18 new conceptions of market order,19 and new strategies among firms.20 The catalyzing force of public controversy in a particular sector has been stressed in numerous studies of private regulatory initiatives.21 Public attention and controversy focus the efforts of transnational activists on particular sites.22 They also create legitimacy crises for industries and put a premium on initiatives that can improve reputations or allow firms to differentiate themselves.23 Haufler, for instance, shows how the “blood diamond” framing created a legitimacy crisis for the industry in major diamond producing countries and led to support for the Kimberley Process certification system.24 Linton argues that the “coffee crisis” of the 1990s spurred the growth 17
Gereffi, Garcia-Johnson, and Sasser 2001; King and Lenox 2000; King, Lenox, and Barnett 2002; Potoski and Prakash 2009; Darnall and Sides 2008. 18 Baumgartner and Jones 1993; Schneiberg and Bartley 2001. 19 Fligstein 2001. 20 Suchman 1995. 21 Esbenshade 2004; King and Lenox 2000; Kolk 2005; O'Rourke 2006. 22 Seidman 2007. 23 King, Lenox, and Barnett 2002; Potoski and Prakash 2009. 24 Haufler 2009. http://www.bepress.com/bap/vol12/iss3/art7 DOI: 10.2202/1469-3569.1321
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of various sustainability certification initiatives, since it both threatened the viability of the specialty coffee industry and highlighted ecological damages associated with price volatility.25 In the realm of labor and forestry standards, Sethi argues that anti-sweatshop activism creates a “legitimacy gap” between societal expectations and the current practices of firms, which firms must be aggressive in narrowing,26 and Cashore et al. find that the extent of external pressures contributes to whether forest certification is supported in a particular country or not.27 Espach’s work perhaps goes furthest in explicitly linking the severity of external scrutiny and legitimacy crises to the growth of certification in particular countries. He argues that forest certification grew more in Brazil than in Argentina in part because: In a national industry with as bad a reputation as Brazilian forestry, responsible firms must do everything they can to indicate their social and environmental responsibility. Since the 1970s, Brazil’s national image has been tarred by images of ruthless deforestation and an uncaring government. This legacy places a mighty burden on companies that wish to legitimately sell products from the rainforest. They must differentiate themselves from a sea of nefarious, unethical competition and compete against the constant supply of cheap illegal wood. Many firms ultimately view certification as critical for their public images, or to avoid scrutiny and criticism.28 This dynamic is further fueled by the ineffectiveness of domestic government responses, such that “the legacy of decades of state ineffectiveness or indifference has had a strong positive influence on FSC effectiveness, though not in any way the government would have wished.”29 The second major factor stressed throughout the existing literature involves the export dependence of industries and their position in supply chains. It is the increasing importance of export-oriented production in developing countries that creates the conditions for private regulatory initiatives to gain authority.30 Furthermore, it is export-oriented sectors that have become subject to private regulatory initiatives, while those parts producing for domestic 25
Linton 2008. Sethi 2003. 27 Cashore, Auld, and Newsom 2004. 28 Espach 2009, 77. 29 Espach 2009, 90. 30 Gereffi, Garcia-Johnson, and Sasser 2001; Seidman 2007; Vandergeest 2007. 26
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consumption have been relatively untouched by such efforts.31 Going further, the degree of export dependence of particular sectors is expected to shape whether private regulatory systems take hold or not, since this is the mode through which international controversy is translated into market demand.32 Cashore et al. show that export dependence shaped which regions and countries in Europe and North America had the most support from industrial forest companies for the FSC,33 and Auld et al’s review of the literature finds that “most work indicates that sending exports to Europe or North America increases the probability that an operation will certify.”34 Overdevest’s comparison of Swedish and Finnish timber industries suggests that export dependence may even be sufficient to lead industry actors to upgrade their forest certification efforts, largely trumping other differences between national industries.35 While some work has suggested additional factors—including the associational structure of industries and domestic policy agendas36—the literature as a whole speaks loudly and almost in unison regarding the crucial role of public controversy and export dependence, making them the focus of my analysis.
2.2 Controversy and Export Dependence in the Indonesian Forest Products Sector By each of these criteria, the forest products and apparel/footwear industries in Indonesia would both appear to be ripe for the growth of certification. Both industries were the focus of international controversy and intense external scrutiny, and both are highly dependent on exports. In the remainder of this section, I describe the contours of this scrutiny and export dependence, starting with the case of forestry and then moving to apparel and footwear. Indonesian forests have rapidly deteriorated over the past two decades. Indonesia lost nearly a third of its primary forest cover (from 70.4 million to 48.7 million hectares) from 1990 to 2005, a period when deforestation rates were actually slowing in much of the rest of the world.37 Both slash-and-burn agriculture and large-scale clearing of forests (often for conversion to agriculture) 31
See Amengual 2010; Gulbrandsen 2009. Gulbrandsen notes that since “most of the seafood in developing countries is consumed locally, in markets with little or no interest in ecolabeling, fisheries certification probably has limited potential to spread among the fisheries in these countries” (2009, 659). 32 Prakash and Potoski 2006. 33 Cashore, Auld, and Newsom 2004. 34 Auld, Gulbrandsen, and McDermott 2008, 195. 35 Overdevest 2010. 36 Auld, Gulbrandsen, and McDermott 2008; Cashore, Auld, and Newsom 2004; Espach 2009. 37 Food and Agriculture Organization (FAO) 2006. http://www.bepress.com/bap/vol12/iss3/art7 DOI: 10.2202/1469-3569.1321
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have contributed toward a long term trend toward deforestation, but a confluence of factors made the late 1990s an especially destructive period. First, facilitated by El Nino and destructive large-scale logging, the forest fires that raged throughout Indonesia in 1997-1998 created a haze that spread through much of Southeast Asia and fed into a crisis of confidence in the Suharto regime.38 The instability that resulted from the Asian financial crisis and fall of the Suharto regime further facilitated the rapid exploitation of forests, as did the subsequent decentralization of forest governance, as land users and government officials raced to exploit as much as they could in this ambiguous legal environment.39 This degradation certainly did not go unnoticed. International environmental organizations mobilized attention to the destruction of Indonesian forests through much of the 1980s and 1990s. In addition to noting the ecological damage being wrought, environmentalists pointed out the ways in which government development policy, corruption, and ties between the industry and military were contributing to massive deforestation.40 Tropical timber boycotts and proposed governmental bans swept through much of Europe in the late 1980s and often targeted Indonesian timber, leading the Indonesian industry and government to complain about western protectionism.41 It was in the midst of these boycott campaigns that Indonesia became the site of what is usually seen as the first independent forest certification effort. In 1990, the Rainforest Alliance certified forests managed by Perum Perhutani, a state-owned forestry company, in order to recognize innovative harvesting techniques being used there and provide a “positive alternative” to boycotts.42 In sum, from the late 1980s through the late 1990s, Indonesia was the subject of intense international scrutiny—implicating both industry and government—boycott campaigns, major visible moments of crisis, and even an early experiment with forest certification. These dynamics would seemingly make Indonesia ripe for the growth of forest certification, which was initially created with tropical forests in mind.43 Certification, by this logic, might allow responsible firms to differentiate themselves and improve the international image of the industry. The industry’s export dependence should further increase the chances for certification to grow there. In 1997, Indonesian producers exported approximately $5.2 trillion worth of wood products—more than either Brazil or Malaysia, and putting it among the top forest products exporters in the world (3rd
38
Dove and Kammen 2001. Curran et al 2003; McCarthy 2004. 40 Dauvergne 1993. 41 Vogt et al 2000. 42 Donovan 2001; Ussach 1990. 43 Bartley 2007; Elliott 2000. 39
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by one account, 6th by another).44 In that year, it ranked first in the world in exports of plywood, 7th in pulp for paper and 9th in sawnwood (all by volume).45 The vast majority (upwards of 90%) of both wood-based panels (including plywood) and wood pulp produced in Indonesia is exported.46 The sizeable furniture industry is also largely geared toward exports. Through the 1990s Indonesia was one of the six largest furniture exporters in the developing world,47 and its furniture industry accounts for nearly 3% of the country’s total export value and around 2% of its total manufacturing output.48 Though shaken by the Asian financial crisis and recent economic downturn, furniture remains a major sector, roughly half of which is currently exportdriven.49 Some portion of this consists of high end specialty furniture, for which a “green premium” might be feasible. Indeed, in recent years, a variety programs sponsored by NGOs and development agencies (including USAID, GTZ, and the ILO) have sought to upgrade the Indonesian furniture industry and make it “known as a source of sustainable products.”50 As an example of how export-dependence can increase the leverage of activists (including advocates for certification), consider the campaign led by Greenpeace in the early 2000s, which showed that “wood being used for the new Ministry of Environment building in the UK had come from logs that could be traced back to a protected area in Kalimantan and [an illegal] timber trader.”51 As a result, several major British importers ceased purchasing Indonesian timber,52 exports to the UK dropped significantly, and negotiations soon began over how to eliminate illegal logging in Indonesia.53 Separately, an unexpected domestic constituency for certification may also exist in some trade unions, whose interest in maintaining employment in export-oriented sectors may lead them to promote “sustainable forests for sustainable jobs.” As one union official in this sector (an affiliate of the Building and Woodworkers International, BWI) put it, “We work to get more companies to get certified because we need to secure the jobs for our In sum, as with the international controversy surrounding members.”54 deforestation, the character of forest products exports should, by the logic of most
44
Lebedys 2008 and FAO ForeStat database, respectively. FAO ForeStat database. 46 FAO, Country report for Indonesia, Exports and Imports. 47 Kaplinsky, Morris, and Readman 2002. 48 Posthuma 2004. 49 ASEANAFFAIRS 2009. 50 Author's interview with forest certification advisor, Yogyakarta, 6/23/09. 51 Author's interview with forestry consultant, Jakarta, 7/3/09. 52 Hall 2003. 53 Author's interview with forestry consultant, Jakarta, 7/3/09. 54 Author's interview with union official, Jakarta, 6/30/09. 45
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treatments of certification, make Indonesia a prime candidate for the expansion of programs like the FSC.
2.3 Controversy and Export Dependence in the Indonesian Apparel/Footwear Sector Turning to the apparel and footwear industries, one again finds a high degree of international scrutiny and export dependence. In many ways, the anti-sweatshop movement of the 1990s got its start in Indonesia. In 1992, Nike first became the target of anti-sweatshop activism with the publication of a major exposé of its Indonesian contract factories55 (though its Vietnamese suppliers were also attracting sweatshop attention at this time). This all occurred 2-3 years before the major wave of international anti-sweatshop activism (which peaked in 19951997), putting Indonesia very much on the front lines of this battle. Media attention to problems of sweatshops and child labor in Indonesia increased in the mid-1990s.56 Nike, of course, became synonymous with the sweatshop stigma, and other companies, including Reebok, adidas, and the Gap, also faced scrutiny over their Indonesian factories. The U.S. government threatened several times between 1987 and 1995 to revoke Indonesia’s status in the Generalized System of Preferences (GSP) due to complaints about restrictions on the right to freedom of association and harassment and intimidation of workers.57 This wave of anti-sweatshop pressure actually led to increased wages in the Indonesian textile and apparel sector (where they were low compared to other sectors),58 but the devaluation of the rupiah in 1997 soon drastically reduced the real earnings of low wage employees, and growing poverty and food riots fed into anti-government protests. The collapse of the rupiah lowered production costs for the industry,59 but also led anti-sweatshop activists to make the immiseration of Indonesian workers one of their central rallying calls.60 Naomi Klein’s chronicle of anti-corporate activism, No Logo, for instance, began with a story of underpaid Indonesian garment workers who struck after “being forced to work long hours of overtime but [not] being paid at the legal rate.”61 On the whole, the Indonesian garment and footwear industries were hit with the “sweatshop stigma” early and often, especially over wage issues, and in the later years, also suppression of trade union rights. 55
Spar and LaMure 2003. Harrison and Scorse 2006. 57 Harrison and Scorse 2006. 58 Harrison and Scorse 2006. 59 Dicken and Hassler 2000. 60 Monshipouri, Jr and Kennedy 2003. 61 Klein 1999, xv. 56
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These industries are also quite dependent on exports. The rapid growth of the Indonesian garment industry in the 1980s and early 1990s was driven primarily by exports.62 While parts of the garment and footwear industry are geared toward domestic production, Dicken and Hassler estimate that approximately 65% of all clothing produced in Indonesia between 1982 and 1997 was exported.63 Especially important are large retailers and brands (e.g., Nike, JC Penney, and Marks & Spencer) based in Europe and the U.S.—the two main destinations of Indonesian garment exports.64 In 1996, at the height of antisweatshop activism, Indonesia’s textile and garment exports were valued at $6.5 trillion, second only to China among Asian exporters, and these exports made up approximately 25-30% of all Indonesian exports of manufactured goods throughout the 1990s.65 Indonesian garment and footwear manufacturers have faced a nearly constant threat of losing their position in global supply chains. Since the 2005 removal of apparel import quotas for the American and European markets, buyers have shifted orders to China, as well as to rapidly growing industries in Vietnam and Bangladesh, in search of lower costs. This has generated many attempts to determine whether the Indonesian garment industry can survive. At present, the export-oriented garment sector has not died, and some orders have returned to Indonesia, due to rising wages in China and work disruption in Vietnam.66 At a recent conference, the sourcing director for the U.S. apparel conglomerate, VF, reported that the company will more than triple its sourcing from Indonesia in the next four years, since “labor costs and living standards are growing so fast in China and Vietnam.”67 Though the threat of losing orders looms large, it appears that Indonesia will continue to be a major apparel and footwear exporter over the coming years. Interestingly, some have suggested that garment industries in precisely this situation could benefit from branding themselves as socially responsible sourcing Though Indonesian trade unions are extremely fragmented, locations.68 Indonesian law does support freedom of association69—an aspect of companies’ codes of conduct and CSR policies that is routinely flouted when they source from China and Vietnam, where only state-controlled unions exist. Buyers who want to lend credibility to their codes of conduct might be expected to prefer 62
Dicken and Hassler 2000, 265. Dicken and Hassler 2000, 270. 64 Hill 2000. 65 Hill 2000. 66 Author's interviews with trade association official, Jakarta, 7/8/08 and with foundation official, Jakarta, 6/25/09. 67 Presentation at WRAP conference, Jakarta, 7/2/09. 68 Polaski 2006. 69 Caraway 2006a. 63
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Indonesian factories, and Indonesian factories might flock toward something like the SA8000 certification offered by Social Accountability International to enhance their reputation as responsible producers. Of course, if branding the industry as responsible meant raising wages substantially, supplier factories might find themselves priced out of the market. Yet at the margins, one might expect Indonesian factories to seek advantages through non-price competition—perhaps by highlighting decent working conditions or the existence of a union—or to see trade associations or government agencies promoting the country as a responsible sourcing location. In general, as in the forest products industry, both public attention and export dependence would appear to make the Indonesian garment and footwear industries susceptible to and interested in international certification efforts. As prior analyses have argued, credible third-party certification should be an attractive option when firms face significant external scrutiny and occupy market positions that make them vulnerable to international pressures.70
3. The Status of Certification in Indonesia 3.1 Patterns of Forest Certification While there are reasons to expect certification to become an important form of social and environmental governance in Indonesia, for the most part, it has not. In the case of forest certification, there were only nine FSC-certified forest management units in Indonesia as of 2009, representing approximately 1.09 million hectares total. While this is not an insubstantial amount of land, it makes up but a small fraction of the country’s roughly 100-120 million hectares of total forest cover, more than half of which is designated by the government for “sustainable” production purposes.71 A comparison with other countries puts the extent of FSC certification of Indonesian forests further into perspective: Brazil has seen much greater amounts of land FSC-certified (61 forest management certificates, 5.46 million hectares). Even smaller countries like Bolivia and Latvia have more FSC-certified land (1.73 and 1.62 million hectares, respectively) than 70
One additional feature of the Indonesian garment industry potentially bodes well for advocates seeking to gain leverage for multi-stakeholder certification efforts: The garment industry does not have its own trade association (though the association for textile manufacturers does work with garment manufacturers to some degree). This lack of associational capacity should, by some accounts, decrease the industry’s ability to fend off external challenges and thus increase its chances of acceding to pressure to cooperate with multi-stakeholder certification initiatives (Cashore et al 2004). 71 Muhtaman and Prasetyo 2006. Published by Berkeley Electronic Press, 2010
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Indonesia does. The Indonesian alternative to the FSC, Lembaga Ekolabel Indonesia (LEI), has similarly certified only 20 forest management units covering 1.5 million hectares, and the largest of these units are mostly also certified by the FSC.72 Compare this to the 4.4 million hectares certified by the Malaysian Timber Certification Council, that country’s domestic alternative to the FSC.73 In sum, forest certification in Indonesia has not grown nearly as much as we would expect based on theories that stress international attention and export-dependence. The stunted growth of forest certification in Indonesia is not for lack of effort on the part of international organizations. Government aid agencies, international NGOs, and retailers have sponsored a number of projects and consultancies to assist Indonesian forest concession-holding firms in getting FSC certified. The Tropical Forest Trust (TFT) is a UK-based nonprofit linked to European buyers, which has worked with dozens of Indonesian timber firms to move toward FSC certification. Similar work is done by WWF’s Global Forests and Trade Network (GFTN) and the Timber Trade Action Plan, which is sponsored by timber importers and European governments. Yet few of the companies involved in these projects have actually made it to the endpoint of attaining certification of forest management.74 At the macro level, forest certification has done little to stem the tide of forest degradation, conversion of forest land to agriculture, and illegal logging—all of which remain serious threats to Indonesian forests. Indonesia is perhaps the clearest illustration of Gullison’s argument that FSC certification has had an impact on the few companies that have been certified but has failed to shift the broader dynamics of deforestation and land degradation.75 It is possible that low levels of certification could reflect the strict application of standards, and thus signal a kind of success rather than failure of the FSC in Indonesia. It is true that FSC-accredited auditors operating in Indonesia (the Rainforest Alliance and SGS) have refrained from granting outright “sham” certifications, and watchdog NGOs (including Greenpeace, the Forest Peoples Programme, and FSC-Watch) have kept a close eye out for such cases. Nevertheless, the evidence about auditing does not suggest an especially strict interpretation of compliance. In the absence of an FSC-endorsed national standard for Indonesia (discussed below), auditors must use their own standards, which increases their discretion in certification decisions.76 My initial analysis of audit reports over time reveals that many of the changes that forest managers were required to make in order to get (or stay) certified were procedural rather than 72
See, http://lei.or.id/en/. See, http://mtcc.com.my/documents_downloads/MTCC_AR2008_web%20use.pdf. 74 Author's interview with forestry consultant, Samarinda, 7/6/09. 75 Gullison 2003. 76 Maletz and Tysiachniouk 2009. 73
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substantive, and many of the auditors’ “corrective action requests” went unfulfilled. In some cases, unmet corrective-action-requests led auditors to suspend the certificate, as required by FSC rules, but in at least two cases (PT Erna Djuliawati and PT Intracawood), instances of repeated non-compliance appear to have been finessed by the auditors, allowing the company to keep its certificate. It is also possible that the low level of certified forests could simply reflect a lack of demand for certified wood by the industries that process forest products. While it is difficult to assess this possibility fully, it is notable that while FSC certification of forest management units has been limited, there has been quite a lot of FSC “chain of custody” certification, which provides the users of certified wood with the ability to label their products as such. As of 2009, there were approximately 130 FSC “chain of custody” certificates in Indonesia, mostly of furniture factories, and this type of certification has grown dramatically among factories in China, a major destination for Indonesian timber. Yet, this capacity for processing certified timber is often underutilized, due the limited supply available. As a result, manufacturing firms that are seeking to tap into green markets often turn to other sources of timber. One Javanese furniture company sells an FSC-certified product using certified timber imported from the U.S.77 Another uses teak wood reclaimed from dismantled traditional Javanese houses.78 Others are hopeful that the supply of certified new teak will increase soon, though as discussed in a later section, the de-certification of Perum Perhutani forests makes this unlikely.79 Several larger firms that supply to the home furnishings retailer, IKEA, are also among those with “chain of custody” certification, constituting a potentially important market driver. In general, a puzzle still remains as to why the supply of FSC certified timber has remained limited while the apparent demand for it (in the furniture sector at least) has increased. After reviewing patterns of certification in the labor standards case, I suggest some partial solutions to this puzzle.
3.2 Patterns of Factory Certification Certification of factories with decent labor conditions has similarly had only a limited presence in Indonesia to date. As of 2009, the leading international, multi-stakeholder factory certification—Social Accountability International’s SA8000 standard—was in place for only 11 factories in Indonesia, employing a total of approximately 19,000 workers, a tiny fraction of the country’s total labor 77
Author's interview with furniture manufacturer, Solo, 6/19/09. Author's interview with furniture manufacturer, Yogyakarta, 6/22/09. 79 Author's interview with furniture manufacturer, Yogyakarta, 6/24/09. 78
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force of approximately 112 million.80 This compares poorly to SA8000 certification in other countries with competitive garment industries, like India (396 facilities, covering approx. 269,000 workers), China (231 facilities, 221,000 workers), Pakistan (87 facilities, 47,000 workers), and Vietnam (47 facilities, 54,000 workers).81 Clearly, SAI’s role in Indonesian labor issues has been quite circumscribed. Furthermore, it is not clear that those factories that are SA8000-certified are always model factories. Two Indonesian factories were certified despite questionable management activities. In one case (PT Teodore Garmindo), a complaint spurred an investigation that revealed that management was forcing permanent workers to resign and replacing them with temporary, contract workers, a violation of domestic labor law. In this case, the firm’s certificate was revoked. In another case (PT Kasrie), SAI allowed a certificate to continue, despite finding in its investigation that management had infringed upon freedom of association by firing union organizers, which the original audit had overlooked, and which successfully derailed the insurgent union in the factory.82 As one observer noted, it is “incredible that trade unionists were fired and a new trade union structure was raised close to management, and SGS [the SAI-accredited auditing firm] said there was no problem.”83 However, independent, multi-stakeholder certification is only part of the picture. In this arena (unlike forestry), the stronger, multi-stakeholder certification system has foundered, but a weaker, industry-driven system has grown significantly. The Worldwide Responsible Apparel Production (WRAP) program was originally created by the American Apparel and Footwear Association as an alternative to SAI and the Fair Labor Association.84 As of early 2009, there were 50 WRAP-certified factories in Indonesia, more than in Vietnam (44) and roughly comparable to the number in Thailand (54), though still less than in China, Pakistan, or India.85 WRAP is also seeking a greater foothold in Indonesia in the coming years.86 Unlike SA8000, the WRAP principles set no 80
Central Intelligence Agency 2009. Social Accountability Accreditation Services, certified facilities list, www.saasaccreditation.org/certfacilitieslist.htm. 82 Social Accountability Accreditation Services 2005. In addition to pointing out the limited nature of SAI’s response, this case illustrates the challenges of freedom of association in a context where multiple unions are vying for power, occasionally with as many as three unions seeking to represent workers at a single facility and questions about which unions are legitimate and which are “yellow.” 83 Interview with labor rights advocate, Bonn, 7/17/09. 84 See Bartley 2007. 85 Worldwide Responsible Accredited Production, Certified Facilities, www.wrapcompliance.org/certified-facilities. 86 Observation of presentation at WRAP conference, Jakarta, 7/2/09. 81
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criteria for wages or hours of work beyond what is allowed by local law; nor do they address the use of contract labor to avoid legal obligations or operationalize freedom of association. More importantly, available evidence suggests that auditing under the WRAP system is quite lax. One Indonesian industry advisor described the audit as “Not so difficult. . . . If they [supplier factories] want to have the certification, then they can get it.”87 Even some for-profit labor auditors (who have themselves been criticized as “captured” by activists and scholars) perceive the WRAP program as weak. As one said, “we’ve found a lot of factories audited by WRAP—but our findings conflict—some [in ways that are] critical, like falsified records or double-books.”88 In general, in this case, the weaker initiative has outpaced the stronger one, arguably making labor standards certification in Indonesia little more than a sham. Yet this description does not fully capture the state of voluntary labor standards in the Indonesian garment and footwear sector. Private regulation has indeed become prominent in some parts of this sector but less through third party certification than through the internal compliance activities of major brands. The brands producing in Indonesia who have been most subjected to activist scrutiny—Nike, adidas, The Gap—have developed intensive internal monitoring programs, supplemented in some cases by external audits done under the auspices of the Fair Labor Association, but they do not rely on factory certification. This flies in the face of a received wisdom that says that as claims and counter-claims about corporate social responsibility spiral, third party certification should become the dominant institutional arrangement for reestablishing credibility and trust. WRAP appears to have captured the market for brands that do not have a compliance office that directly oversees supplier factories. Given that third-party certification has become the norm in many other sectors (including forest products) and given theoretical arguments about its superior credibility, the persistence of internal, firm-specific compliance activities in the garment and footwear sector is somewhat puzzling. This and other puzzles, both within and across the cases of labor and forestry, are taken up below.
4. Toward an Explanation The preceding discussion has highlighted the puzzle of why both forest and labor standards certification are underdeveloped in Indonesia, relative to theoretical expectations. Solving this puzzle in a comprehensive fashion would require cross-national comparisons that are beyond the scope of this paper. Nevertheless, 87
Interview with garment industry consultant, Jakarta, 6/29/09. Interview with social compliance auditor, Jakarta 6/30/09. For more on falsification and audit fraud, see Locke et al 2009.
88
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I develop partial solutions by delving deeper into the practice of private regulation in each field, starting with forestry and moving to labor.
4.1 Forest Certification in an Unsettled Socio-Legal Environment Why has forest certification remained so circumscribed in Indonesia? One barrier has to do with market demand, since although exports are crucial, many Indonesian forest products are exported to Japan and China, where consumer and retailer demand for green products is very limited. Still, given that some exports to China will be manufactured into products destined for U.S. and European markets (illustrated by the growth of “chain of custody” certification in China) and given that the U.S. and EU remain important export markets in themselves, especially for specialty furniture, the underdevelopment of green markets is only part of the solution to the puzzle, not the whole story. The other important set of dynamics has to do with what appear to be deep conflicts between the logic of certification and the political economy of land use in Indonesia. Simply put, certification evaluates particular forest units, but in several respects, forest governance in Indonesia does not respect the integrity of such units. At the beginning of the New Order era (Suharto regime), the Indonesian state claimed essentially all forest land and remains responsible for granting concessions to manage it. The state has on the one hand prioritized the clearing of forests for conversion to agriculture (especially acacia and oil palm plantations), leading to massive amounts of deforestation and forest degradation. But at the same time, the state has encouraged the growth of industries with an insatiable appetite for timber and a reliance on natural forest concessions to feed that appetite—and when that is not enough, a reliance on illegal timber. Barr argues that this “structural timber deficit” has made a joke of the Indonesian government’s claims to manage natural forest concessions “sustainably.”89 In the words of a plywood conglomerate official, “The government won’t let the industry collapse from lack of raw materials because plywood is too important for the economy. The Forestry Department will always find a way to make more timber available, as long as the demand exists.”90 Politically, this structural timber deficit fostered close ties between the Indonesian military, Ministry of Forestry, and the large investment groups—like Sinar Mas/APP Group, Raja Garuda Mas/APRIL Group, and Samko Timber— that dominate the pulp and paper and plywood industries. The government subsidized a huge growth in the capacity in these industries in the 1990s, and then defined them as “too big to fail” in the Asian financial crisis, leading to bailouts 89 90
Barr 2001. Quoted in Barr 2001, 40.
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and further fostering short term profit opportunities and moral hazard.91 Certification, like many other policy interventions in this area, fails to tackle what Barr argues is the root cause of deforestation and illegal logging—overcapacity in the pulp, paper, and plywood sectors. This context of state-supported timber exploitation appears to have penetrated firms’ decision-making in a way that counteracted possibilities for greening the industry. Of course, not all firms have taken this route. Plywood firm PT Sumalindo Lestari Jaya has embraced FSC certification, even though, as one executive put it, “any benefit would be very slow” and a price premium was rare,92 but few other companies are “ahead of the curve” in this way.93 The contradiction between firms rooted in a logic of short-term profits and rapid resource exploitation on one hand and opportunities to fill green market niches on the other hand became especially clear in one important case. Moving toward this green niche, pulp and paper conglomerate APP Group began in 2003 to forge a series of partnerships with FSC-affiliated NGOs and certifiers, which assessed a small portion of the company’s land and considered granting it “chain of custody” certification. The company publicly touted its links to the FSC, but it did so without changing its overall timber supply practices.94 Under pressure from media and environmental groups charging APP with greenwash, the FSC publicly disassociated itself from APP and developed a “policy on association” to prevent the misuse of its name in the future.95 In terms of land use, a structure of collusion and moral hazard has sometimes kept both the Ministry of Forestry and parent companies from allowing forest managers to harvest particular areas in responsible ways. Forest management firms taking steps toward FSC certification—such as those involved in the TFT or GFTN projects mentioned above—have sometimes had the rug pulled out from under them, either by parent companies focused solely on shortterm balance sheet entries or government agencies reapportioning forest concessions.96 Reflecting on the contradiction between the FSC’s focus on the forest management unit and Indonesian forest firms’ inability to fully control the forest units they are managing, one person working in this arena lamented that “maybe sustainability at the forest management unit level is not sustainable.”97 A second conflict between the logic of forest certification and the practice of land use in Indonesia has to do with the character of land tenure itself. The 91
Barr 2001. Author's interview with timber executive, Jakarta, 6/28/09. 93 Author's interview with NGO official, Jakarta, 7/8/08. 94 FSC Watch 2008; Raitzer 2008. 95 Author's interview with certification official, Bonn, 7/17/09. 96 Author's interview with forestry consultant, Samarinda, 7/6/09. 97 Author's interview with forestry consultant, Samarinda, 7/6/09. 92
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process of defining boundaries and gazetting forests of particular types has been stalled, leading to a situation in which, by some estimates, 90% of state forest land is of ambiguous legal status.98 Though land tenure is a problem in many developing countries, land reforms have been especially slow in Indonesia. Indonesia is also a case in which the land use practices of the central government largely fail to acknowledge a set of customary, community-based land rights (adat). Such ambiguity about the legal status of forests not only accelerates dynamics of deforestation,99 it directly conflicts with the standards of the FSC. FSC principles two and three say, among other things, that “local communities with legal or customary tenure or use rights shall maintain control, to the extent necessary to protect their rights or resources, over forest operations unless they delegate control with free and informed consent to other agencies,” (principle 2.2) and that “the legal and customary rights of indigenous peoples to own, use and manage their lands, territories, and resources shall be recognized and respected” (principle 3). Yet the Indonesian Ministry of Forestry has often granted concessions to timber firms for land where communities claim customary adat rights or where the legal status of the land is disputed.100 This creates dilemmas for firms interested in certification, certifiers, and watchdog NGOs. Some NGOs have argued that credible FSC certification is structurally impossible in Indonesia because of land tenure issues.101 Companies often argue that they have gained permission to land through normal channels and should not be punished for this.102 The FSC and its certifiers have argued that companies and communities might come to private agreements about land rights that satisfy the “free and informed consent” principle, though critics charge that this is no substitute for serious land tenure reform, especially if companies can “buy off” community elites.103 This makes the terrain of certification especially uncertain and contentious. As one forestry consultant put it, “the problem is where you [a company] as a rights holder come up against an ineffective government. ‘I’ve done what I can. Is that good enough? Or are you [the certifier] going to hold me ransom?’”104 Far from transcending state power, attempts to certify Indonesian forests have highlighted the continuing significance of the state in setting the parameters for land use. These problems came to the fore in 2001, when the Rainforest Alliance suspended the certificate of Perum Perhutani, the state-owned forestry company 98
Author's interviews with NGO representative, 6/18/09 and with certification official, Bogor, 7/1/08; Colchester, Siriat, and Wijardjo 2003. 99 See McCarthy 2004. 100 Colchester, Siriat, and Wijardjo 2003. 101 Colchester, Siriat, and Wijardjo 2003. 102 Author's interview with industry executive, Jakarta, 6/26/08. 103 Colchester 2006. 104 Author's interview with forestry consultant, Jakarta, 7/3/09. http://www.bepress.com/bap/vol12/iss3/art7 DOI: 10.2202/1469-3569.1321
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that had been the first in Indonesia to be certified. By the late 1990s, tensions between the company and surrounding communities had mounted, and Rainforest Alliance auditors eventually decided that the company’s limited efforts toward cooperation and production sharing with the community were insufficient to stem the tide of unauthorized logging on its land.105 As the auditors reported, “illegal timber trade networks have been operating for as long as the state claimed ownership of all forest lands in Indonesia, [but] times of political destabilization, such as 1998 and 1999, are characterized by sharp increases in illegal harvesting.”106 There were also reports of hostage-taking and “a number of deaths at the hands of security forces.”107 Perum Perhutani was a major supplier of teak and other hardwoods, and the suspension of the certificate affected numerous downstream firms and raised questions about the future of FSC certification in Indonesia. While the FSC has continued its operations there, the Perum Perhutani case partly explains why there is a disconnect between the capacity for processing certified forest products (i.e., “chain of custody” certification) and the actual supply of certified timber (i.e., forest management certification). Finally, forest certification is complicated by the lack of an FSC-approved national standard for Indonesia. The FSC’s universal “Principles and Criteria” are intended to be adapted to particular ecosystems and societal conditions through national or regional standard-setting processes. These processes can serve as important arenas for dialogue among stakeholders and for the precise operationalization of the FSC’s broad principles.108 Despite two decades of experience with forest certification in Indonesia, no FSC-recognized national standard yet exists there. As a result, FSC-accredited certifiers develop and rely on their own internal standards, giving greater discretion to auditors rather than subjecting this process to broader scrutiny and dialogue. Perhaps most importantly, the lack of a standard-setting process may mean a missed opportunity to resolve some of the conflicts discussed above. National standard-setting processes in some other countries have certainly not eliminated conflicts, but they have helped to rectify divergences between forest concession practices and FSC principles and have laid foundations for improved company-community relations.109 The reasons for the lack of a national standard for Indonesia are complicated, but largely revolve around the shifting and somewhat uneasy relationship between the FSC and Lembaga Ekolabel Indonesia (LEI), which was 105
Donovan 2001. Rainforest Alliance SmartWood Program 2002. 107 Colchester, Siriat, and Wijardjo 2003, p.183. 108 Tollefson, Gale, and Haley 2008. 109 See Tollefson, Gale, and Haley 2008 on the process in British Columbia, which has some interesting similarities to Indonesia. 106
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developed in 1993 as a response “from within Indonesia” to international scrutiny and certification efforts.110 Due in large part to the leadership of former Environment Minister Emil Salim, LEI was less beholden to industry than many other domestically-driven certification efforts, which led to discussions between FSC and LEI about the development of national standards. For a variety of reasons, various partnerships between FSC and LEI continued, but only tenuously so, and an FSC-recognized national standard never emerged.111 In sum, Indonesia has proven a difficult setting for forest certification, due largely to the political economy of forestry and the ambiguous character of land tenure. These obstacles are not necessarily unique to Indonesia, but they do appear to be less tractable in this setting than in some others. Furthermore, there has been enough scrutiny of certification efforts themselves—from watchdogs both within and outside Indonesia—and enough transparency built into the FSC system, that the result has been stunted growth rather than the growth of sham certification. More generally, this analysis suggests that the prominence of forest certification is likely to be limited not only by the destination of exports (with green demands present in some more than others) but by characteristics of the state and its relationship with industry, particularly (a) investment, development, or land use policies that support short-term profit maximization by forest products firms (and at the extreme, moral hazard) and (b) ambiguous and/or contentious land tenure.
4.2 Labor Standards through Multiple Mechanisms The limited significance of certification of labor standards in Indonesia is somewhat easier to explain. The question here is why multi-stakeholder, thirdparty certification has not won out over weaker, industry-driven certification on one hand, or over firm-specific internal compliance activities on the other hand. Two factors can help make sense of this outcome. First, the character of supply chains in the garment and footwear sectors, and the position of large branded firms within them, appears to have facilitated the persistence of internal compliance and a low degree of reliance on third-party certification among brands with the greatest investments in CSR. Firms like Nike, adidas, the Gap, and Marks & Spencer have responded to sweatshop scrutiny by developing high profile compliance programs to monitor their suppliers. While in some industries, such firms have become key supporters of multi-stakeholder certification initiatives, in this case, they have tended to build 110
Author's interview with forestry expert, Bogor, 6/30/08. Author's interview with NGO official, Jakarta, 7/8/08 and with certification official, Bogor, 7/1/08. 111
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their own internal compliance staff, usually working out of sourcing offices in the region.112 This allows for greater direct surveillance and a lower demand for third party certification. But why would such firms prioritize internal compliance? One partial answer is that their brand reputations are salient enough and individualized enough that they can gain more from investing in an improved individual reputation than by buying into a collective symbol of good practice (i.e., certification).113 In addition, they are close enough to their suppliers, both geographically and in terms of their position in the supply chain that they have the capacity to directly monitor compliance. If certification is an alternative to direct relationships as a way of guaranteeing trust—as several arguments suggest114— then the value of certification may be minimized by many apparel and footwear firms’ shift to longer-term collaborative relationships with key suppliers, as described by several scholars.115 Indeed, there is growing evidence that routine interaction between internal compliance staff and factory management may actually be a more effective way of solving labor problems than the kind of formalized, external auditing central to certification.116 This is not to say that all apparel and footwear brands have spurned external monitoring and certification. To the contrary, many have become supporters of WRAP certification. But it appears that the brands and retailers that would be most likely to support multistakeholder initiatives have relationships with suppliers that reduce the value of external certification. In the next section, I explore why this may differ between the labor and forestry cases. Second, while Indonesia has been a hotbed of controversy over labor conditions, the responses to this problem have not predominantly been channeled into certification efforts. At the international level, efforts to promote credible labor standards systems have been few and far between (especially in comparison to the numerous efforts to promote independent certification in the forestry arena, where consultants and advocates from WWF, the Nature Conservancy, World Bank, USAID, and other agencies are extremely active). Some development agencies, such as GTZ in Germany, have been active in linking “social” (i.e., labor) and environmental certification in various settings, but this does not appear to have translated into “on the ground” projects in Indonesia. Recently, the International Labor Organization (ILO) and International Finance Corporation (IFC) have begun to develop a “Better Work” factory monitoring program in Indonesia. But to date at least, international efforts to promote labor standards in Indonesia have been limited. Notably, a USAID-funded project on upgrading the 112
Author's interviews with compliance staff, Jakarta, 7/10/08, 7/1/09. See Garcia-Johnson 2001. 114 King, Lenox, and Terlaak 2005; Rao 1998. 115 Locke, Amengual, and Mangla 2009; Gereffi, Humprhey, and Sturgeon 2005. 116 Locke, Amengual, and Mangla 2009. 113
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Indonesian garment sector decided to sidestep labor issues altogether after initially including them in the plan.117 Neither have domestic coalitions for labor reform coalesced around certification initiatives. In the post-Suharto Reformasi period, trade unions and labor-oriented NGOs have focused largely on domestic labor law reforms.118 To the extent that trade unions in the garment and footwear sector (e.g., affiliates of Serikat Pekerja Nasional (SPN), Gabungan Serikat Buruh Indonesia (GSBI), and others) have engaged with private regulatory standards, they have focused primarily on codes of conduct and framed them as “alternative tools—besides using the local and national labor law.”119 Their allies in international human rights organizations (e.g., Oxfam, Clean Clothes Campaign) have also become attuned to the ways in which domestic regulatory arrangements, such as labor dispute resolution courts, can be useful in certain campaigns.120 There is no evidence of domestic labor rights activists promoting SA8000 certification as a way to support unionized jobs, in contrast to the “sustainable forests for sustainable jobs” discourse of woodworking unions. The lack of enthusiasm for certification among domestic activists is not entirely surprising, since trade unions, NGOs, and anti-sweatshop activists have often portrayed certification systems as corporate dominated, weak in enforcement, and disempowering.121 But scholars have often assumed that some type of domestic coalition for certification would emerge when state capacities are limited or legal channels are compromised.122 A recent report echoes much other work in portraying certification as a way of compensating for weaknesses in government regulation.123 The Indonesian case complicates this notion, since no such coalition can be found in spite of the fact that enforcement of labor law is highly imperfect, corruption is rampant, and government labor inspection is extraordinarily weak.124 In spite of significant problems in the implementation of labor law, Indonesia is a democratic polity where legal protection of labor rights has expanded in the past decade, especially in the protection of freedom of association and the construction of a labor court system.125 Even on the controversial topic of contract workers, Indonesian labor law is stronger than the strongest codes of conduct and certification standards, though this law is often flouted in practice. This availability of public regulatory avenues, however 117
Author's interview with development consultant, Jakarta, 6/29/09. Ford 2009. 119 Interview with trade union leader, Jakarta, 6/25/08. 120 Interview with NGO leader, Jakarta, 7/7/08. 121 Esbenshade 2004; Seidman 2007. 122 Sabel, O’Rourke, and Fung 2000. 123 National Research Council 2010. 124 Robison and Hadiz 2004; Ford 2009. 125 Caraway 2006a; Caraway 2006b. 118
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imperfect, combined with labor advocates’ critiques of the certification model in general, may explain why international attention and export dependence have not translated into the growth of credible, multi-stakeholder, “high-road” certification in this case. In its absence, a weaker “low-road” form of certification (WRAP) has grown as a way to assuage buyers with minimal CSR commitments. Going further, it may be that domestic conditions for multi-stakeholder certification are most likely to exist either in closed, authoritarian polities (including Vietnam and China) where other options are constricted, or in countries with more stable systems of labor law, where “beyond compliance” activities may be on the agenda.
4.3 Labor and Forestry: Divergent Trajectories? Research on private regulation increasingly compares standard-setting and certification systems across different industries and issue-domains.126 This work has made a powerful case that similar forms of private regulation are emerging in diverse settings and has helped to expand the scope of the literature. Yet, as Vogel points out, the consequences of private regulation seem to vary across issue domains.127 My analysis of labor and forestry standards in Indonesia highlights several specific differences across these two domains: In forestry, multistakeholder certification (through the FSC) has been promoted in Indonesia by a variety of international organizations, but has experienced limited growth there, partly due to uncertainty and patronage in the political economy of timber and land use, as discussed above. Here, “high road” international certification efforts are symbolically important though practically limited. In the case of labor standards in the apparel and footwear sector, multi-stakeholder certification (through SAI) is not especially prominent. Labor standards are more likely to be governed by individual firms or by weaker, industry-driven certification. Here, third-party certification has largely taken a “low road,” and among those who might have supported a “high road,” one finds firm-specific compliance activities and activism geared more toward the state. What might account for these different trajectories of standards and certification? First, there appear to be differences in these industries that are overlooked by the more typical strategy of emphasizing their similarities as “buyer-driven” commodity chains subject to controversy and activist pressure. A great deal of support for FSC certification has come from large retailers like Home Depot, IKEA, Staples, and Kingfisher, which occupy powerful positions in 126
Bartley 2007; Espach 2009; Gulbrandsen 2005; Taylor 2005; Vogel 2008; Büthe and Mattli 2011. 127 Vogel 2005. Published by Berkeley Electronic Press, 2010
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forest product supply chains. Yet large and powerful retailers of apparel—like The Gap, Federated Department Stores, and mega-retailers Wal-Mart, Target, and Sears—have not played a comparable role in supporting multi-stakeholder factory certification; nor have brands like Nike and adidas. Part of the reason lies in the kinds of pressures these firms faced from activists. Forest products firms faced well-coordinated market campaigns that often explicitly called on them to support the FSC, while apparel and footwear firms faced anti-sweatshop campaigns that rarely endorsed factory certification as a solution.128 In addition, in both industries, these lead firms in the supply chain depend directly on their image with consumers, but an important difference lies in their relationship with suppliers. With the exception of IKEA, buyers of forest products appear to have more arms-length relationships with suppliers, who retain responsibilities for design and sourcing of materials. “Buyers” of apparel typically provide the exact designs to suppliers and sometimes arrange for textile sources as well. Recent trends toward closer, more collaborative relationships in the apparel and footwear industries further contribute to a situation in which internal compliance activities are preferred over external certification. These differences may help to account for the underdevelopment of multi-stakeholder certification of labor standards, though it cannot explain why this activity has taken hold more in some countries than in Indonesia. In addition, the difference in the prominence of “high road” over “low road” certification may reflect differences in the transparency of certification associations and of the activities they certify. The FSC publicly discloses detailed summaries of audit reports for certified forests, while the SAI discloses only the name and location of certified factories, not their audit reports. Furthermore, the state of forests is more visible to external watchdogs than the state of particular factories is. Partly for these reasons, external scrutiny has been a stronger disciplining force in forestry, keeping pressure on the FSC not to water down its standards, while also building its credibility relative to lower road competitors. Finally, it is worth considering whether deep differences in the politics of labor and environmental issues might send certification initiatives down different paths. Distinctions between labor and environmental issues are often overstated. It is tempting to assume that “greening” is more technical, less “social,” and more efficiency-enhancing than are attempts to improve labor conditions. But this caricature overlooks the ways in which many environmental issues—especially forestry—are intertwined with communities, power, and social inequalities, not to mention the “technical” side of labor issues like occupational health and safety.129 It also overlooks the similarities of land and labor as what Polanyi called 128
Conroy 2007; O’Rourke 2005. Furthermore, although responsible forest management may help to mitigate global warming, it is not like energy efficiency initiatives that promise to save money for consumers and firms. 129
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“fictitious commodities”—that is irreducibly social things that are treated as if they are merely quantities to be bought and sold.130 Beyond these caricatures, there are several ways of thinking about potentially important differences in the politics of labor and environmental issues. For many scholars, this means thinking about the extent to which positive externalities associated with improved production practices flow to the public at large—that is, the extent to which certification systems generate public goods rather than only private benefits.131 Of particular importance for certification systems is the extent to which broad benefits might flow to affluent consumers, such that their interest in buying a certified product goes beyond merely “warm glow” preferences132 or the desire for political expression.133 Improved air quality or reductions in global warming, for instance, might provide direct, albeit diffuse, benefits for consumers. The question, then, is whether sustainable forestry and fair labor are different in this regard. Forests’ contribution to enhancing biodiversity and mitigating global warming do make them more in line with conventional analyses of public goods. On the other hand, if one believes that labor standards might generate not only private benefits for the covered workers but also outcomes like greater respect for rights or a leveling of destructive competition in international labor markets, then certification in this arena might conceivably generate public goods as well. These may flow primarily to other workers rather than to the public at large, but these categories should be almost completely overlapping. In short, it is clear that environmental problems have been more powerfully associated with a “common good” frame, but it is less clear if this is fully justified. A more promising route would focus more on the historical development, ideologies, and strategies of labor and environmental movements in both domestic and transnational spheres. At the transnational level, the “compromise of liberal environmentalism,” whereby major environmental NGOs became more accepting of market mechanisms in the latter part of the 20th century134 has no direct analogue in the labor rights movement. This is likely due to a mix of strategic, ideological, and organizational differences between these two movements,135 as well as elite responses to the movements. Though a full analysis of this issue is beyond the scope of this paper, such an exercise may help explain why the FSC has received more consistent support from environmental NGOs than an initiative like SAI has from trade unions and labor rights activists. Within the Indonesian 130
Polanyi 1944. Kotchen and Veld 2009. 132 à la Feddersen and Gilligan 2001. 133 à la Micheletti 2003. 134 Bernstein 2001. 135 Evans and Kay 2008; Obach 2004. 131
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context, environmental movements are certainly not uncontroversial, but they may be less marginalized than labor movements. Labor activism has had more space since democratization, but it nevertheless exist in the shadow of a national history that includes anti-communist purges and killings of union leaders (with a total death toll approximated at 500,000) in the wake of the 1965-66 attempted coup and rise of the Suharto regime.
5. Conclusions The Indonesian case reminds us of the variety of factors that can limit the significance of private regulation at the point of production. While both the forest products and apparel/footwear sectors in Indonesia experienced high degrees of international controversy and export dependence, in neither sector did credible, third-party certification take hold as much as expected. In the forestry case, the FSC attracted a great deal of attention but fairly low levels of uptake, and concerns about its utility in the Indonesian context have persisted. In the labor standards case, SAI has been outpaced by the weaker WRAP system of certification, while many leading brands have continued to rely on internal compliance activities rather than turning to certification. It is clear that an emphasis on controversy and export dependence—while an important start—is insufficient to explain the conditions under which multistakeholder systems become prominent forms of governance at the point of production. This inquiry suggests several revisions and extensions. First, export dependence needs to be unpacked, most simply to deal with exports to destinations (especially in Asia) with few demands for environmental or social responsibility, but more substantially, to consider how the supply chain position of lead firms mediates or moderates the effects of export dependence. Existing treatments of export dependence assume that lead firms in buyer-driven commodity chains will tend to demand multi-stakeholder (or at least, third party) certification. This support cannot be assumed, since it appears to be contingent on (a) the particular demands of activist campaigns targeting those firms and (b) the relationship of image-conscious lead firms to their suppliers, with closer relationships minimizing the demand for external certification. Second, greater attention is needed to the domestic political economy of the industry at hand, not simply its transnational dimensions. In particular, this analysis has highlighted (a) business-state relationships, including structures of dependence, collusion, and moral hazard, which can affect the likelihood that firms will shift away from exploitative strategies and short time horizons, (b) the clarity and legitimacy of property rights (such as land rights in the forestry case) and their administration, which can shape the fit between domestic conditions and http://www.bepress.com/bap/vol12/iss3/art7 DOI: 10.2202/1469-3569.1321
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transnational certification schemes, and (c) the ways in which particular types and moments of political regimes channel domestic coalitions toward public or private arenas of rule-making. Such considerations are not fully captured by existing discussions of domestic policy agendas in theories of certification. These focus largely on the openness of government agendas to non-business interests.136 Perhaps because this work has dealt mainly with affluent democracies in Europe and North America, it says little about how unstable property rights, democratization, and deep entanglements of industry and government—factors relevant to many developing countries—might shape the trajectory of private regulation. Research on private regulation has often left the application of standards as something of a black box. Some assume that this black-boxed process works “as advertised,” while others assume that private regulation is not up to the task anyway—meaning that opening the black box would merely reveal a smokescreen. This analysis has demonstrated that the chain of demands and assurances involved in certification is both more complex and more interesting either of these stylized possibilities. To better understand these dynamics, scholars should not only expand the set of comparative cases and extend the claims above, they should develop rich sources of data on the process of implementation. One limitation of this study is that it cannot fully open the black box to reveal how auditors make provisional judgments in the field, how firms implement new practices effectively, or how advocates and consultants guide firms toward certification. These processes are important for fully unpacking the certification model. Do these findings mean that transnational standards cannot reasonably be expected to apply in diverse domestic settings? Will attempts at universal standards ultimately prove fruitless? Based on this research and other work on global standards, it appears that it is not that universal standards cannot be applied in diverse settings. It is that doing so requires a great deal of work by actors in the chain of demands and assurances. Here, scholars of private regulation would do well to follow the lead of a growing literature on the “translation” of global standards into particular settings, articulated most powerfully by Merry137 and elaborated by other socio-legal scholars.138 Scholars of private regulation should abandon the image of global standards bypassing the state and transcending old configurations of power and instead attend to the fascinating ways in which standards are filtered, renegotiated, or compromised as they enter particular political economies.
136
Cashore, Auld, and Newsom 2004. Merry 2006. 138 Fourcade and Savelsberg 2006; Halliday and Carruthers 2007. 137
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Social
Accountability Accreditation Services. 2005. “Complaint #006: Certification Improper because of Major Non-conformance.” Spar, Debra L. and Lane T. LaMure. 2003. “The Power of Activism: Assessing the Impact of NGOs on Global Business.” California Management Review 45 (3): 78-101. Suchman, Mark C. 1995. “Managing Legitimacy: Strategic and Institutional Approaches.” Academy of Management Review 20 (3): 571-610. Taylor, Peter Leigh. 2005. “In the Market But Not of It: Fair Trade Coffee and Forest Stewardship Council Certification as Market-Based Social Change.” World Development 33 (1): 129-147. Tollefson, Chris, Fred Gale, and David Haley. 2008. Setting the Standard: Certification, Governance, and the Forest Stewardship Council. Vancouver: University of British Columbia Press. Tsing, Anna L. 2005. Friction: An Ethnography of Global Connection. Princeton: Princeton University Press. Ussach, Ivan. 1990. “Letter to Bob Simeone, Nov. 13, 1990.” Personal archives of FSC organizer. Vandenbergh, Michael P. 2007. “The New Wal-Mart Effect: The Role of Private Contracting in Global Governance.” UCLA Law Review 54: 913-970. Vandergeest, Peter. 2007. “Certification and Communities: Alternatives for Regulating the Environmental and Social Impacts of Shrimp Farming.” World Development 35 (7): 1152-1171. Vogel, David. 2005. The Market for Virtue: The Potential and Limits of Corporate Social Responsibility. New York: Brookings Institution Press. Vogel, David, 2008. “Private Global Business Regulation.” Annual Review of Political Science 11: 261-282. Vogt, Kristiina A., Bruce C. Larson, John C. Gordon, Daniel J. Vogt, and Anna Fanzeres. 2000. Forest Certification: Roots, Issues, Challenges, and Benefits. Boca Raton, FL: CRC Press.
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Article 8
PRIVATE REGULATION IN THE GLOBAL ECONOMY
The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label Shana Starobin, Duke University Erika Weinthal, Duke University
Recommended Citation: Starobin, Shana and Weinthal, Erika (2010) "The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label," Business and Politics: Vol. 12 : Iss. 3, Article 8. Available at: http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322 ©2010 Berkeley Electronic Press. All rights reserved.
The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label Shana Starobin and Erika Weinthal
Abstract Hundreds of “eco-labels” and “social labels” exist for consumer products. These labels claim to provide information about characteristics of these products, which consumers cannot directly observe but which many of them consider desirable, such as low environmental impact, good treatment of workers during production, and relatively high prices paid to the local producers of ingredients from developing countries. Third-party certifiers are supposed to solve the well-known problem that a producer's unilateral declarations lack credibility, given the producer's conflict of interest and the information asymmetries between producer and consumer. Much of the literature on global private regulation—through standards for environmental sustainability, corporate social responsibility, among others—assumes that third-party certification works (i.e., overcomes the problems of producer self-declaration). But closer inspection shows that many third-party certifiers lack credibility. This article examines why some third party certifiers are more credible than others. In doing so, we elucidate the ways in which social capital and trust bolster third party certifiers’ credibility. The empirical analysis focuses primarily on Kosher food labels within the global food supply chain. We then explore the consequences of the credibility paradox for other third party certified labels that promote social and environmental values. KEYWORDS: certification, Kosher label, credible information, trust, social capital, regulation Author Notes: Shana Starobin is a PhD candidate at the Nicholas School of the Environment, Duke University; she can be reached via email at:
[email protected]. Erika Weinthal is Associate Professor of Environmental Policy at the Nicholas School of the Environment, Duke University; she can be reached via email at:
[email protected]. The authors would like to thank Sarah Bermeo, Tim Büthe, Nathaniel Harris, the participants of the October 2009 workshop “Private Regulation in the Global Economy” at Duke University, and two anonymous reviewers for Business and Politics for comments on previous drafts.
Starobin and Weinthal: Search for Credible Information in Social and Environmental Governance
1. Introduction Following the introduction of the first national eco-label in Germany in 1977–the Blue Angel–there has been a proliferation of eco-labels worldwide.1 While some of these labels, like the Blue Angel, were developed as part of government information disclosure efforts, non-state actors—including manufacturers, business associations, nongovernmental organizations (NGOs), and third party certifying agencies—have created other eco-labels to address growing demands from civil society for additional environmental protection and safety.2 Hundreds of informational eco-labels abound on products from packaged foods to washing machines, with the number of new labels and certification schemes continuing to expand. Spread across the end-user-market, these labels claim to provide information about product characteristics that are not directly observable by consumers but considered desirable by many of them, such as low environmental impact, good treatment of workers during production, or relatively high prices paid to the local producers of ingredients from developing countries. By claiming compliance with the well-established International Organization for Standardization’s ISO 14,000-series of industry-designed standards, for example, companies attest that they are engaged in certain environmental management practices.3 Through providing consumers with information about the environmental and social impact of products, these labels thus help to increase consumer awareness. More so, because these labels are voluntary policy tools, they rely on “moral suasion” to convince consumers that a product is consistent with his or her values.4 Yet, owing to the combination of a producer’s conflict of interest and the information asymmetries between producers and consumers, a producer’s unilateral declarations to have acted in accordance with the standards embodied in the label (should) often lack credibility with consumers. One mechanism that has been proposed as a solution to the all-too-familiar credibility dilemma is third party certification.5 Specifically, a rule-making body X (what Büthe calls the 1
Eco-labels are one type of ‘new’ environmental policy instruments (NEPIs) that put emphasis on the role of information (Jordan et al 2003b). Other forms of NEPIs include environmental taxes and voluntary agreements. As informational devices, eco-labels are “non-binding voluntary policy tools” (Jordan et al 2003b, 568) that convey information about environmental impacts associated with producing, distributing, consuming and/or disposing of a product. Eco-labels also may convey similar information about products’ social impacts. 2 See Jordan et al 2003a; NCEE 2001; NCEE 2004. The Blue Angel is licensed by the German Institute for Quality Assurance and Labeling. 3 Prakash and Potoski 2006. 4 Jordan et al 2003a, 11. 5 Gereffi et al (2001) describe a hierarchy of certifications, implicitly moving from least to most Published by Berkeley Electronic Press, 2010
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“supplier” of regulation) sets a standard for the quality, environmental sustainability, or other characteristics of goods or services produced by Y.6 In order to overcome the credibility problems associated with producer selfdeclaration, a third party then certifies that the product of Y meets the standards specified by X.7 Regarded as a “best practice” in the literature on private regulation,8 third party certification represents an institution designed in principle to reduce transaction costs by allowing for a credible commitment. To achieve and maintain ISO 14,001 certification, for instance, participating firms agree to submit to regular third party audits. In recent years, various civil society organizations (NGOs) have begun to scrutinize these third-party certification schemes. For example, the consumer watchdog organization, Consumer Reports, launched the on-line Greener Choices site in 2005.9 Its label index currently lists over 150 eco-labels for products appearing in the U.S. alone. One key way it has sought to discern the credibility of third party certifications is to categorize certifiers according to non-profit, civil society, government, or private, for-profit business; this is intended to get at the motivations potentially driving these private regulators.10 Whether a label is “meaningful,” moreover, depends upon two aspects of the label. First, it depends upon the clarity of the label, i.e., whether its name and symbols convey real information or confuse consumers. The recall of more than half a billion eggs in August 2010, for instance, has drawn attention to what exactly the labels on egg cartons mean.11 “Free-range,” for example, does not necessarily connote that the
credible, based on the independence of the certification standards and those certifying compliance. Whereas first party and second party certification involve organizations verifying their own compliance with standards, third party certification involves an outside, independent party (such as an NGO) for monitoring and verification, though typically this third party is still paid for by the business seeking certification. "Fourth party" certification involves independent external agents as well, though their oversight is not paid for by those seeking certification. 6 Büthe 2010. 7 We use the term “third party certifier” to encompass any of the following: 1) standard-setting organizations which also certify compliance with their standards; 2) legally distinct organizations which conduct the auditing associated with the standards set by a linked, parent organization; 3) organizations whose primary business is serving as a third party certifier—verifying compliance with standards set by others and lacking explicit connection to the standard-setting organization. With few exceptions, the producer being certified pays for the third party certification. 8 Gereffi et al 2001; Prakash and Potoski 2006. 9 For information about Greener Choices, see: http://www.greenerchoices.org/eco-labels/. 10 Among other things this website offers report cards assessing the credibility of 11 categories of eco-labels across multiple criteria—including whether the standard is independently verified, whether various stakeholders and the general public are included in the development of the certification’s standards, and whether certification information is made publicly available. 11 Neuman 2010. http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322
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chickens have been outside.12 Second, meaningfulness depends upon the extent to which the label can be “verified in a consistent manner.”13 Focusing on the proliferation of certification schemes and their impact on social and environmental performance within the global supply chain, the bulk of the scholarly literature on certification, voluntary agreements, and private authority has assumed away rather than examined how we actually know whether those who are certifying are credible.14 For the most part, the literature has only emphasized that third party certifiers need to be independent in order to minimize potential conflicts of interest with businesses seeking certification and, in some cases, with the standard-issuing organization as well. Thus, as is common with third party certification, businesses seeking the certified label associated with a standard-issuing organization will often pay an outside independent party to verify compliance with the standard.15 Moreover, as the above discussion indicates, even efforts to determine the credibility of certification schemes have focused their attention on the credibility of the standard and the organization creating the standard, but not on the third party certifiers. While there is much information available regarding those firms that undergo the often time consuming and costly processes of certification, the certifiers still remain a black box. When one takes a closer look at these third-party certifiers, however, it appears that many of them actually lack credibility. Accompanying the rapid proliferation of eco-labels (and mounting evidence that third party certification has market appeal as product- and profit-enhancing) has been an increase in the number of claims that have been disclosed as false or vastly exaggerated—an indication that these schemes are not foolproof.16 The proliferation of labels in 12
Kristof 2010. Greener Choices categorized some 80 of the 150 labels examined as “General Claims”—a category employed to distinguish those eco-labels that are not independently verified and typically placed on products by the manufacturers themselves. Of these 80 labels, only 35 were determined to be “somewhat meaningful” and 45 distinguished as “not meaningful;” none of these labels met the additional credibility criteria. In contrast, among the better-known eco-labels claiming to be “Organic,” all 36 were declared both “highly meaningful” and “verifiable,” though only 14 of these met the additional credibility criteria outlined by Greener Choices. 14 See Bacon et al 2008; Bray 2002; Gereffi et al 2001; Green 2008; Prakash and Potoski 2006; Vogel 2005. Prakash and Potoski note the presence of dissenting voices on the practice of independent verification by a third party. Likewise, Green questions the role of third party certifiers—arguing principal-agent problems arise when private actors are delegated authority to certify. 15 Gereffi et al 2001. 16 Greener Choices, for instance, identifies numerous labels that, they believe, lack credibility. Overall, with an increase in the number of labels, more opportunities for rent-seeking behavior have also ensued. For more detail, see the literature on greenwashing. See Laufer 2003; McCluskey 2009; Prakash 2002. 13
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combination with the rise of disclosure of false or questionable claims made through labels makes it increasingly difficult for end-consumers to distinguish among the various labels—to differentiate the credible from the questionable— leading to consumer confusion and reduced utility of labels in purchasing decisions. Confronted with this proliferation of labels, some retailers have gotten involved in efforts to minimize consumer confusion and help consumers in their pursuit of additional layers of reliable product information. Already in 1989, WalMart attempted, albeit unsuccessfully, to implement its own labeling scheme— which involved demarcating store shelves with labels indicating “environmentally friendly” products.17 The program was ended by 1992, as Wal-Mart itself faced the dilemma of discerning what criteria distinguished “environmentally friendly” products and, moreover, how to evaluate the credibility of environmental claims made by manufacturers (Wal-Mart's suppliers). If Wal-Mart struggled to discern credible information—despite its great market share and unprecedented access to information about manufacturers within the global supply chain—how can we expect highly atomized consumers to do so?18 There has been little if any research that has unbundled what makes some third party certifiers more credible than others or even endeavored to define the meaning of “credibility” and identify the sources for its creation and dissolution. For the global food commodity chain, such research is of particular importance, given that third party certification represents an often-cited solution to the information asymmetries that exist between producers and consumers, especially as certification schemes move from the local to the global scale. Thus, while the literature on third party certification suggests that the independence of the certifier is necessary for credibility, we argue it is not sufficient. Third party certification in and of itself creates a principal-agent problem19—that is, how does one monitor the agent that is empowered to grant certification? For a third party to be credible, we argue, first and foremost hinges upon either an oversight mechanism or self-enforced commitment that involves an active civil-society or consumer network. Simply put, third party credibility requires both an institutional mechanism that provides updated and accurate information about participating producers (including the disclosure and sanctioning of unreliable and false claims) and, even more importantly, active participation from a knowledgeable and vigilant consumer base. Second, another often-unexplored component within the literature is the role of trust; indeed, certification schemes and their accompanying oversight bureaucracies are often 17
EPA 1993. EPA 1993, 20. More recently, Tesco, the British food giant, has sought to compute the carbon footprint of its products in its stores. See Specter 2008. Fuchs and Kalfagianni (2010) also discuss Tesco’s various initiatives. 19 On principal-agent relationships, see Sappington 1991. 18
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perceived as “substitutes for trust.” Thus, while third party certifiers may incorporate transparency mechanisms that ensure information is both disclosed and reliably conveyed along the supply chain, these mechanisms, we posit, are necessary but not sufficient substitutes for trust. In order to explore what makes third party certifiers credible in general and specifically pertaining to the global food supply chain, the article proceeds as follows. In the first section, we discuss the information problem underlying global supply chain governance, especially as it relates to the food sector and third party certification as a viable solution. In the second section, we explore the basis for “independence” as an implicit source of third party credibility within the scholarly literature on private regulation and certification. We elucidate the criteria for understanding what makes some third party certifiers more credible than others, not only emphasizing the elements of trustworthiness and expertise, but also the inclusion of an active civil-society or consumer network. In the third section, we examine Kosher certification to illuminate the mechanisms for enhancing third party certifiers’ credibility. Kosher was selected because it is one of the oldest known international certification schemes for food and, like eco-labels, Kosher seals are often applied to products made far away from the ultimate point of sale. Moreover, Kosher has evolved as an institution from a local to global scale in order to deal with the changing nature of the global food supply chain. In the concluding section, we draw implications from the empirical analysis of Kosher for other third party certified labels—such as Organic and Fair Trade. 2. Information and the Global Food Supply Chain Certification and the development of international standards have arisen, in part, in response to the transformation in the world economy brought about by economic globalization and especially the liberalization of international trade.20 Since the 1960s, global production has become increasingly fragmented, characterized by the growth in the trade of parts and components.21 While the outsourcing of parts has allowed manufacturers to take advantage of cheaper labor and inputs elsewhere, it has also raised issues of whether all the parts and components along the commodity chain meet the same level of standards and quality. Similarly, within the world food system, countries have moved away from a focus on self-sufficiency and protectionism. In its place a global food system has materialized, which is increasingly integrated, consisting of a complex network of exchanges between producers and consumers that includes the 20 21
Gereffi et al 2005. Arndt and Kierzkowski 2001.
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harvesting, processing and transportation of food.22 While on the one hand, growth in the international food commodity trade allows for increased efficiencies, on the other hand, the elongation of the food supply chain raises questions pertaining to food safety and truth in advertising on the labels affixed to food products.23 Within a global food supply chain, information problems, thus, abound in assuring that an increasingly complex web of ingredients and finished products pass from producer to end consumer via a series of intermediaries and across geopolitical boundaries without producing “harm” along the way. In agriculture and food processing, import safety problems can arise due to substantial differences in the principles or standards between exporting and importing countries (i.e., exporting country A has lower safety standards compared to importing country B) or due to noncompliance by involved parties with otherwise viable standards (e.g., where a producer uses a cheaper, unverified substitute for an ingredient).24 Such information asymmetries present significant institutional design challenges for public and private authorities seeking to manage import safety to minimize health risks as well as challenges for institutions seeking to ensure that values-based standards have, likewise, been upheld—standards pertaining to social, environmental or other ethical values that are unobservable and often even un-testable in food. As the global food supply chain becomes longer and more complex, private third parties act as surrogates where government lacks the capacity to oversee and monitor portions of the supply chain.25 One way private third parties act as surrogates for public authorities is through providing information to consumers via labeling and certification. Outside the direct supervision of international or state authorities, third-party certification offers producers an opportunity to voluntarily participate in a form of private regulation in order to convey particular information about the quality or nature of their business, product or process to potential consumers (either other organizations or individual consumers). The Fair Trade Certified label, for example, seeks to guarantee to customers that stringent economic, social, and environmental standards were met in the production and trade of an agricultural product.26 Focusing on the products themselves and how they were produced, the main principles underlying the Fair Trade Certified label include a fair price, fair labor conditions, direct trade, democratic and transparent organizations, community development, and environmental sustainability. Endorsed by many leading US-based cafes, restaurants and retailers that sell these products, Fair 22
McDonald 2010 forthcoming. Nestle 2003. 24 Büthe 2009. 25 Zaring and Coglianese 2009. 26 See Bacon et al 2008; Bray et al 2002. 23
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Trade Certification suggests a reputational linkage between the label and those organizations endorsing and providing a marketplace for the certified product. In the case of Fair Trade products certified for sale in the United States, the third-party certifier—for example TransFair USA27—serves as an intermediary broker, verifying information obtained during auditing of producers, transmitted along the supply chain, and appearing to end-consumers as a label on retail products, like coffee, chocolate, fresh fruit, and flowers.28 In an ideal scenario, the presence of this third-party improves efficiency by eliminating information asymmetries between consumers and producers. As a consequence, third party certification should enhance benefits or equity for producers, encourage stewardship of communities and natural resources, make it easier for other participating parties to enforce the rules and abide by agreed-upon norms, or generally achieve the objectives embodied in the label. For participating producers, ideally there would also be minimal transactions costs—at least for information and access to market—though fees and opportunity cost of time involved represent potential barriers to entry. Consumers, on the receiving end, would, in this ideal world, understand precisely what the third-party label certifies and adjust their behavior accordingly. Correctly inferring a higher level of environmental and social sustainability associated with the product purchased, consumers could better align their consumption choices with their ethical values, attitudes and beliefs and reduce the cognitive dissonance experienced as a result of pursuing value-incongruent actions.29 For marginalized producers, third-party certification might offer more equitable and beneficial access to valuable global markets and other spillover benefits. But what about the potential costs and benefits to the third parties themselves? If these third-party certifiers are selfappointed and relegate to themselves the private authority to make rules and enforce them upon others, what ensures that these certifiers indeed provide correct and pertinent information? How do they obtain credibility or how can they lend it to claims about the product? Is anyone supervising and certifying the private regulators? Third party certifications in the global food supply chain may be accompanied by a traceability system that, by definition, “…provides a set of data about the location of food and food ingredients along the supply chain.”30 While some traceability systems might be established for the purposes of increasing 27
TransFair USA, http://www.transfairusa.org/. Fairtrade Labelling Organizations International (FLO) provides a comprehensive, searchable list of products bearing Fairtrade labels. See http://www.fairtrade.net/products.html. 29 This assumes that people seek to align their actions with their preferences and values. An influential theory from social psychology—the theory of cognitive dissonance—suggests that people have motivational drives to decrease such dissonance, influencing changes to their underlying beliefs and attitudes (and potentially their behavior). See Festinger 1957. 30 Meuwissen et al 2003, 169. See also Auld et al 2010. 28
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supply chain transparency—for the functional purpose of increasing consumer trust—other systems might be put in place to reduce the risk of liability claims or improve efficiency in the event of a recall—an especially important concern where contaminants could result in illness or death of consumers. The increasingly global trade in food products has exacerbated this challenge.31 In the case of food safety traceability and certification systems, the risks are huge in the event of a failure—resulting potentially in illness or death for endusers and significant financial and reputational costs for producers and participants all along the supply chain. The incentives to develop and maintain viable institutions to prevent a failure, thus, appear high for parties that can be indentified and held accountable. Where information is made transparent and errors in the supply chain can be verified and corrected, consumers can theoretically continue to trust this system. For individuals who seek to uphold ethical values in their purchases, the risks along the supply chain from producer to certifier to consumer are similarly high as in food safety. There are reasons, however, to expect differences across issue areas, industries, and products, both with respect to consumer incentives and with respect to producer and certifier behavior. Whereas in the realm of food safety, the risks of illness and death might be sufficiently large to warrant attention and greater vigilance from authorities, the risks might not be so explicit or readily identifiable where social, environmental or other ethical values are concerned, prompting no public monitoring nor enforcement and hence greater stake in the effectiveness of certification. For marginalized producers, certification by a third-party for Fair Trade or Organic for example, should, in principle, offer more equitable and beneficial access to valuable global markets, as well as other benefits. Indeed, the fundamental claim of Fair Trade and many other social labels is that they enable the consumer—who may be situated thousands of miles away from the first contributor to the supply chain—to bring, through his or her purchasing decisions, material benefits (at a minimum in the form of slightly more equitable outcomes) to those who are most marginalized in the production process. However, if information cannot be credibly conveyed to end consumers via product labels— and if the credibility of independent third parties cannot be evaluated— individuals may have no reliable way to know whether they indeed made the intended impact through their purchases.
31
Coglianese et al 2009.
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3. Unbundling Credibility Whereas scholars prescribing the deployment of third parties to resolve this information problem often assume that these third parties are inherently credible,32 the literature on information schemes (i.e., eco-labels and certification) has thus far underspecified the sources of credibility underpinning third party certifiers and their prominent role in private regulation of the global food system. The major way in which the literature has sought to tackle this question of the certifiers’ credibility within the global supply chain, for instance, is through their focus on the costliness of maintaining “independent” certifiers.33 The high price tag charged by those who produce the standards or the agencies certifying compliance with them, as in the case of ISO 14,000-series certification, is seen to imbue a level of credibility.34 Consistent with standard economic rationale, high costs serve as a substantial barrier to entry for those wishing to receive the positive reputational benefits and information signal that certification conveys. Presumably, those willing and able to pay for the costs associated with certification are businesses that have legitimately implemented or complied with the standards. Thus, by virtue of their independence, these third parties are deemed credible to testify whether private actors have upheld the standards they claim to have met. In short, enforcing compliance is costly because it requires independent verification and monitoring by a third party. This leads us to the inevitable question: must certification, then, be costly in order to be credible? The costliness of third party verification represents one informational signal to consumers indicating that claims made by a business are credible. Yet, we contend the costly process, in and of itself, cannot wholly comprise credibility. If credibility must be costly, third party certification simply becomes a “pay to play” situation— potentially leaving behind those whose efforts make them worthy of certification but who cannot afford to pay for the informational signal associated with it. In fact, the “pay to play” approach predominately benefits only those first movers seeking to burnish their reputational assets as socially and environmentally responsible actors. Thus, this costliness, we argue, represents at most a signal of credibility.35 What is surprising in the literature then is this lack of attention to third party credibility.36 While a few studies have included external verification as one 32
Coglianese et al 2009; Gereffi 2001; Prakash and Potoski 2006; Vogel 2005. In similar manner, Gourevitch and Lake (forthcoming) seek to explain what makes NGOs credible and identify costliness among their conditions for credibility. 34 Prakash and Potoski 2006. 35 On the importance of first mover advantage, see Green 2010. 36 Again the notable exception is Gourevitch and Lake, forthcoming. 33
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means to enhance credibility, they, however, do not question the underlying mechanisms that foster credibility.37 Yet, outside of the literature on certification, voluntary agreements, and private authority, scholars working in the field of internet applications have emphasized the importance of the sources of credibility in order to verify the authenticity and reliability of websites.38 Given that many certification schemes also rely upon the internet to disseminate information about their standards and to build their reputation, understanding how credibility operates within the world-wide-web seems to be an obvious place to begin our discussion. According to Fogg et al, credibility is associated with believability: “Credible people are believable people; credible information is believable information.”39 They argue that different levels of trustworthiness and expertise underscore whether one can believe the information being supplied is credible.40 While “trustworthiness” captures the “perceived goodness or morality of the source,” “expertise” incorporates the “perceived knowledge and skill of the source.”41 A consumer label conveying credible information, likewise, can be understood to be a label that is perceived to demonstrate both high levels of trustworthiness and expertise. Thus, based on this broader notion of credibility, third party certifiers’ credibility cannot be understood solely as tied to the costliness of their presumed independence. Rather, the credibility of a certifying agency is also derived from actions that demonstrate the sources of their expertise and which merit consumer trust. One way then in which third party certifying agencies have demonstrated expertise is through the disclosure of their credentials. In particular, certifying agencies can disclose their specific credentials related to the standard in question (such as requisite environmental expertise to verify environmental claims). More so, they may divulge the training, education, and trade qualifications of leadership, staff supervisors and inspectors in order to showcase the sources of their expertise. Indicators of the expertise of third party certifiers might include short biographies or curriculum vitae for agency staff members—especially the leadership overseeing the certification process—as well as demonstrated institutional links between the agency and other respected organizations in the field (i.e., universities, NGOs or other experts). But more often the case is that third party certifies convey their expertise through unsubstantiated self-declarations. For example, Quality Assurance International42—the third party certifier of USDA Organic, among other labels— 37
Gourevitch and Lake, forthcoming. Fogg et al 2001, 61. 39 Fogg et al 2001, 61. 40 Fogg et al 2001, 62. 41 Fogg et al 2001, 62. 42 Quality Assurance International, http://www.qai-inc.com/1_0_0_0.php. 38
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provides little information on their website about the identity of their inspectors and the sources of their expertise. Rather, as a substitute for identifiable information, Quality Assurance International links back to information about their parent organization—NSF International43—an international organization with accreditations from numerous other third party organizations. In contrast, the online product information site—Good Guide44—appears to understand quite clearly the power of unsubstantiated declarations along the lines of “Trust us. We’re experts.” Though they themselves self-proclaim to be an authority providing consumer information on the “health, environmental, and social performance of products and companies,”45 they appear to recognize the questionable credibility associated with the typical self-declarations made by manufacturers and many third parties. Specifically, Good Guide provides consumer users with a dedicated website section identifying their so-named “Trusted Advisors.” While one could argue that a laundry list of accreditations from numerous other third parties demonstrates credibility, one must wonder who resides at the top of the independent party pyramid: who watches those watching the watchmen? Just because a critical mass of others endorse a given organization as “credible” does not necessarily mean that these endorsers have more information regarding the organization’s expertise and trustworthiness. It is well known in economics that consumers make inferences about quality simply based on popularity, irrespective of a demonstrated causal link between the two.46 Another way in which third party certifiers seek to demonstrate credibility is to undertake actions that make the certifiers trustworthy, or at least give them the appearance to be so.47 While trustworthiness is a difficult concept to measure, one way in which trustworthiness can be demonstrated is through transparency mechanisms that convey enough information that can be verified by each individual.48 Transparency mechanisms that indicate the trustworthiness of agencies could include: voluntary disclosure of information regarding false or unreliable claims; information dissemination to consumer audiences via public media, news alerts, emails, websites and other publications; identification of those individuals ultimately responsible and liable for errors made by the agency, including publishing their names and expertise on websites and in other public
43
NSF International, http://www.nsf.org/international/. Good Guide, http://www.goodguide.com/about. 45 Good Guide, http://www.goodguide.com/about. 46 See Bikchandani et al 1992; Chamley 2004. 47 Lake and Gourevitch (forthcoming) in like manner examine the question of what NGOs do to make themselves trustworthy. 48 For a useful discussion of trustworthiness, see Levi and Stoker 2000. 44
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communications; and disclosure of information about the identities of field auditors and their expertise. Yet at present, many of the agencies certifying industries or organizations for meeting certain standards remain anonymous auditors—hidden behind the cloak of secrecy of professional agencies. For example, Michelin developed a reputation as an authority on food quality starting with its restaurant guides for France in 1933;49 their ongoing credibility, however, hinges on the expert reviews conducted by teams of anonymous inspectors.50 The Zagat’s restaurant guide, in contrast, provides transparency mechanisms and relies on the reviews of many participating stakeholders for their final list of recommendations.51 While Michelin might take the idea of independence and anonymity to the extreme, they exemplify one end of the spectrum for third party oversight. Because both the identity of their inspectors and their specific training remains unknown, their expertise cannot truly be evaluated. Reputational mechanisms, however, do remain in play—as those who regard Michelin as the standard and seek to receive its endorsement for their restaurant take it very seriously. While Michelin’s decision making process might not be within the public eye, they reward good behavior as well as sanction shirking (i.e., lower performance) through both giving and taking away coveted stars. As their star ranking system has been given esteem by virtue of consumers and industry experts regarding it as a source of credible information for food quality, Michelin has achieved the status of a revered expert while remaining an independent third party. Furthermore, just as a demonstration of reputational linkages between the certifying agency and other organizations might serve as an indicator of shared knowledge or expertise, so, too, these links can serve as sources of trustworthiness. If, for example, we trust the opinions of environmental groups like the World Wildlife Fund (WWF) with respect to protection of environmental resources, we might also see the third party certification organization—Forest Stewardship Council (FSC)—as trustworthy given that WWF was a founding partner and maintains an ongoing relationship with FSC.52 Indeed, increasingly,
49
Michelin’s restaurant guides were initially devised by the tire-maker as a way to induce Frenchmen to travel more (and use their Michelin tires). This raises the question of the underlying motivations behind the emergence of third party scheme and how such motivations play into consumer perceptions of credibility. 50 Colapinto 2009. 51 Colapinto 2009. 52 Further research might explore the reasons behind continued public trust in the FSC label and if, indeed, this trust is due to the altruistic-seeming motivations of its environmentalist founders and the continuing endorsements of activist groups like Greenpeace—indicating that the motivations and self-interest (or lack thereof) of environmentalists in this certification may be more pure and honest. For a critical review of the FSC’s certification efforts, see Cashore et al 2004. http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322
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environmental organizations have put their names behind some certification and labeling schemes. While third party certifiers’ independence from producers may serve as an important check on private self-interest, independence in and of itself may not be enough to curb shirking. Rather, the social network connecting those demanding private oversight by a third party with those supplying it is also a key design mechanism for credible third party oversight that is, however, often overlooked in the literature on certifications. The underlying foundation of trust, shared norms and values between these groups of individuals fosters the growth of social capital and provides the basis for efficient and lower cost monitoring. Transparency mechanisms provide a further supplement to social capital-enabled monitoring and enforcement, additionally ensuring that information can be made available and transmitted quickly.53 Given the clear import of social capital to maintaining a robust and functioning society, evidence of eroding social capital in American society and elsewhere has motivated scholars like Putnam and Fukuyama to explore avenues for its restoration.54 Our work affirms a need to harness social capital in communities and some form of closer relationships among those who share common values. However, we rather focus on one implication of the variable rates of trust, namely that, where social capital exists within tight-knit communities, it can be leveraged to enable the continual operation of other social institutions. Ongoing relationships ensure that credible reputational threats can be made and enforced. Consequently, they can play a particularly useful role when certification schemes transition from the local to the global scale. We posit that the social capital generated within one tight-knit subgroup of society can create a “radius of trust,” to use Fukuyama’s term, that provides the additional web of oversight for institutional arrangements to operate.55 According to Fukuyama: All groups embodying social capital have a certain radius of trust, that is, the circle of people among whom co-operative norms are operative. If a group's social capital produces positive externalities, the radius of trust can be larger than the group itself. It is also possible for the radius of trust to be smaller than the membership of the group, as in large organizations that foster co-operative norms only among the group's leadership or permanent staff. A modern society may be thought of as a series of concentric and 53
For empirical examples from the institutions literature on the function of informal norms and trust in providing efficient and low cost monitoring, see Ellickson 1991; Greif 2006; Ostrom 1990. 54 Fukuyama 2001; Putnam 1993, 1995. 55 Fukuyama 2001. Published by Berkeley Electronic Press, 2010
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overlapping radii of trust….These can range from friends and cliques up through NGOs and religious groups.56 Essentially, the trust shared among members of a strong group enables cooperative norms to further function among subgroups, community leadership, agency leaders and representatives themselves. Positive externalities may be created from this expanded radius of trust—as the public good created by oversight agencies and a community of vigilant citizen-consumers can additionally serve as an enforcement mechanism minimizing shirking more broadly across the global food commodity chain. In essence, nested sets of linked, ongoing relationships between members of supervising agencies, community leadership and the end consumers may provide supplementary layers of monitoring across scales. Such a role for vigilant consumer participation in the active oversight of global supply chains has thus far been overlooked in the certifications literature, although stakeholder engagement has been a central component for understanding collective action and oversight at a local scale.57 Rather, the literature has primarily focused on consumer willingness to pay for products. Some scholars suggest that the sustainability of “responsibility” within the global supply chain rests on consumer willingness to pay for products consistent with their values—be it fair wages for farmers or improved environmental performance.58 Vogel indicates that consumer willingness to pay represents such a solution; if consumers want a more responsible supply chain, they must be willing to pay the higher costs associated with it as well.59 The persistence of NGOs and watchdog organizations advocating for a collective interest—as that of their members or the public more broadly—has, in fact, remained central to advancing efforts toward greater corporate social responsibility (CSR) across the global supply chain. Those companies which appear most vulnerable become the primary targets of NGO campaigns aimed at shining a spotlight on labor and environmental abuses—from banking to coffee and chocolate to clothing, carpets and soccer balls.60 These NGOs take on the role of public auditor and inspector—scrutinizing the practices of industries 56
Fukuyama 2001, 8. Within the natural resources sector, see Ribot and Larson 2005. In like manner, only recently has public participation been taken into account in the oversight of corporate activities in conflictprone regions. For example, see Banfield et al 2005. 58 Vogel 2005. 59 Vogel 2005. Because costs may be at the root of the compliance problem, Vogel argues that the high compliance costs associated with certification and other forms of voluntary regulation necessitate that some of these costs will be transferred to other stakeholders beyond producers or the corporations distributing final products to end consumers. 60 Vogel 2005. 57
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insufficiently regulated and held to account by weak states or other private authorities. Though NGOs have demonstrated some success at moving select industry actors toward the adoption of more enlightened standards, the standards, however, are not enough to entirely transform sectors. Pressure from NGOs such as Global Witness as well as the coalition of NGOs known as “Publish What You Pay” has led some oil companies—most notably BP—to make public what it pays host governments in Angola and Azerbaijan in royalties and taxation.61 Yet, these efforts along with those espoused by the Extractive Industries Transparency Initiative have yet to influence the practices of other oil companies operating in Sudan, for example.62 Other industry examples also abound where standards have been declared but no enforcement has been prescribed and no evidence of monitoring exists. Vogel, for example, highlights evidence from a garment industry survey conducted by the OECD indicating that monitoring systems were absent in two-thirds of the corporate and industry codes reviews.63 We, therefore, argue that end consumers play a key role in oversight of the global food supply chain—not only by “voting” with their dollars but also by participating actively in the oversight and enforcement initiated by certifying agencies.64 Ensuring the continual transfer of credible information between producers and consumers along a complex supply chain, thus, relies on both consumers’ willingness to pay for products consistent with their values as well as their routine participation in the process. Returning to the global food chain, this would mean that NGOs and other citizen watchdog organizations are necessary but not a sufficient substitute for an actively engaged citizenry that can rapidly respond to changing information about the trustworthiness of not only a brand but also of the certifying agencies overseeing that brand’s products. Without good mechanisms for monitoring and enforcement in place, the standards alone are thus unlikely to suffice.
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Christiansen 2002; Jones Luong and Weinthal 2010. Also see, http://www.publishwhatyoupay.org/English. 62 Human Rights Watch 2003. EITI, however, has made significant strides in improving transparency in revenue management in other countries, including Nigeria, Liberia, and Azerbaijan. See Haufler 2010. 63 Vogel 2005, 89-90, 146. 64 Some would argue that this has high transaction costs for collective action, but while active participation comes with high transaction costs, certain mechanisms—such as online social networking—have reduced those transaction costs. For a broader discussion of the relationship between technology and monitoring costs, see Auld et al 2010. Published by Berkeley Electronic Press, 2010
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4. Third Party Certifiers: A Kosher Case Among their recommendations for improving global governance in food safety, Coglianese et al propose that greater collaboration and coordination among governments as well as private agencies is essential for enhancing monitoring capacity in a global food system with multiple different and sometimes competing food safety standards across the countries in the food supply chain.65 Many of the same problems confronting government regulators in monitoring the global food system likewise represent challenges for private regulators seeking to verify food products as consistent with other standards, including both socially and environmentally driven standards like Organic and Fair Trade as well as those pertaining to religious values, like Kosher and Halal.66 We focus on the Kosher label, which was once perceived as relevant to only a small subgroup of consumers, but has been garnering much broader appeal to consumers outside the Jewish community—including Muslims, Seventh Day Adventists, vegetarians, vegans, and those with other dietary restrictions like gluten or lactose intolerance.67 Increases in demand for Organic and Fair Trade products has, moreover, sparked interest among producers from around the globe, who hope to receive the coveted access to markets and premium prices associated with certified products.68 Likewise, while Kosher historically appealed only to an observant Jewish minority, the Kosher label has transitioned from a local to a global institution in order to cope with both transformations in the food supply chain as well as meet the increasing demand for Kosher products among non-Jewish populations. As of 2010, Kosher ingredients and products are manufactured in over seventy countries69 and sold in more than thirty,70 with a revenue stream exceeding $150 65
Coglianese et al 2009. On the role of sanctioning in Kosher certification, see Sigman 2004. See also Gutman 1999. On private regulation and Halal, see Waarden and Dalen 2010. 67 Kotz 2008. According to Kotz, Jews comprise no more than 20 percent of the population purchasing Kosher products. Many consumers apparently perceive Kosher foods as “healthier” and hence interpret a Kosher symbol not as a reflection of the criteria it actually represents but in terms of a certain belief they have—accurate or otherwise—about what it means. 68 Organic went through a similar evolution from being a niche label, important to only alternative-lifestyle consumers like environmentalists and vegans, to having demand from a broad range of consumers. See Hughner et al 2007. 69 Orthodox Union represents the largest Kosher certifying agency and works with producers of ingredients and finished products from more than 70 countries. 70 The Kosher Supervision Guide—published by Kashrus Magazine for the last 25 years—serves as a source of information on the vast array of Kosher labels and certifying agencies worldwide. See http://www.kashrusmagazine.com/ksg/Old%20and%20deleted/ksg_index.html. The guide lists contact information for certifying agencies and for Jewish community organizations in more than 30 countries. USDA has also published country reports on the Kosher market and 66
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billion annually. For example, while Kosher represented a niche ethnic food market only a few decades ago in France, the market in 2009 was estimated at $549 million in France alone71 ($6 billion in Europe), with annual sector growth averaging 16 percent since the 1990s.72 Kosher also is similar to other food labels in that variations in food harvesting and processing standards and practices across countries have also presented a challenge for Kosher, given that ingredients are sourced from many countries. In the following sub-sections, we will use the case of the Kosher label to explore the dilemma of third party credibility, as it illuminates how an institution initially devised to work at a very local scale has evolved to operate at a global level. This is particularly important as credible information and its transmission is truly an issue of scale. Simply put, Kosher illustrates that the specific identity of third party certifiers is paramount for ensuring their credibility. Only by having identifiable information about who is behind the certifications can consumers and others verify the specific expertise and trustworthiness of a given certifier (and their labels appearing on products). Kosher’s highly evolved web of coordinated institutional arrangements, moreover, enable the extension of locally generated social capital to overseers operating at a global scale—allowing for lower costs and more efficient transactions. Thus, whereas most third party schemes attempt to substitute trust with independence, Kosher schemes rely on trust as an essential glue—binding together certifying authorities and end-users. Ongoing and active feedback mechanisms—through frequently visited websites, list-serves and community dialogue—not only condone the purchase of new products meeting Kosher standards but also appropriately sanction unreliable and false claims, inciting switching behavior away from violators' products. 4.1 Knowing Who to Trust: Kosher on the Local Scale While often overlooked in the scholarly literature on certifications, Kosher (also referred to as Kashrut) represents the oldest known “certification” scheme, with its rules and principles derived from the Old Testament, in Leviticus and Deuteronomy.73 Among the complex web of legal code, the laws of Kashrut opportunities for U.S. importers and exporters for countries with large and growing Kosher markets—like France and Mexico. 71 Journo 2009. 72 Berry 2009. 73 Unlike standards that codify social or environmental values—which may exhibit substantial variation depending upon which stakeholders participated in their development—the Kosher standards themselves are not the primary source of debate among communities following them. Kosher standards have evolved over time and been subjected to extensive scrutiny and dialogue (both oral and written) over generations. Despite their seeming complexity, Kosher standards are Published by Berkeley Electronic Press, 2010
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include specific rules not only with respect to the types of ingredients permissible for use but also protocols for how those ingredients must be processed. The laws of Kashrut, for example, constrain the types of animals fit for human consumption74 and additionally govern how those animals must be killed.75 Certain mixtures of ingredients are also prohibited—such as the combination of milk and meat. Given the long history of Kosher as a certification scheme, how have trust and social capital served to ensure the credibility of the certifying authorities at the community level and enabled community members to uphold a certain set of shared values and standards, efficiently and at a relatively low cost? First and foremost, Jewish law underlies the position that one individual can be trusted, especially where no public interest is at stake (as in one’s own household).76 Thus, presumably friends, family and guests who similarly abide by strict Kashrut will only eat in the homes of others maintaining the standards with the same level of stringency as they do in their own kitchens.77 In a private home, because the individual essentially plays the role of the Kosher enforcement authority, any Kosher-keeping Jew should be able to determine the credibility of Kosher claims associated with food prepared on a very small scale. Second, beyond the legal support for the notion of trusting the individual in personal matters of Kashrut where he or she is sufficiently knowledgeable to both known and well understood by their adherents. Rather, debates within the religious world focus on the appropriate interpretation of the standards, their implementation and oversight. Variations in perceived or actual “stringency” in interpreting and applying the standards may be sources of frequent disagreements between religious sub-sects and the reason for some differing customs between communities. 74 Among mammals, only species that both have cloven hooves and chew their cud are permissible. For example, pigs, which have cloven hooves but do not chew their cud, are not Kosher. Other prohibited animals include birds of prey, fish lacking both fins and scales (as well as other salt-water and freshwater sea food like lobsters), and nearly all insects. See Leviticus 11 and Deuteronomy 14. 75 To qualify as Kosher, meat must come from permissible animals properly killed according to the Jewish ritual slaughtering laws of shechita. 76 According to the concept of eid echad neeman b'issurim, one witness (as opposed to the normal two) is sufficient to be believed in matters of prohibition, as in the case of upholding the laws of Kashrut in one’s own home. Typically, two witnesses are generally needed to affirm that something indeed took place, according to the concept of Al pi shnaim eideim yakum davar, which literally means “according to two witnesses it will exist.” Rabbi Shmuly Yanklowitz raised this point in personal communication with the authors, 15 July 2010. 77 As with formal laws or informal rules pertaining to nearly any issue, multiple interpretations and expressions are possible. In this case, differences in interpretation can evolve into heterogeneity of community custom. Those who are knowledgeable of the rules can readily discern the subtleties that distinguish one community’s customs from the next. Beyond the formal law, community customs—which are operationalized in norms—would determine more specifically who any given community might deem trustworthy. http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322
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do so, close-knit Jewish communities have in place informal norms that serve as an additional check on the trustworthiness of other members of the community.78 Living in close proximity to one another, interacting frequently, and sharing similar educational backgrounds and customs, members of observant communities are in a position to readily observe one another and, hence, obtain a great deal of information about strict adherence or laxity in behavior.79 Third, outside the home at the community level, Kosher dietary laws are further maintained under the supervision of the local Vaad Hakashrut (Council for Kosher Supervision). Functionally equivalent to a more conventional third party certifier at the local scale, the Vaad is comprised of local rabbinic authorities, who retain the power within a given community to decide which foods are acceptable for consumption by members of the community consistent with Kosher law.80 On a very small scale, the rabbi or his affiliates might be supervising the slaughter of animals for meat or offering capacity to the community to ensure that Kosher standards are maintained in shops and restaurants patronized by community members.81 Recognized by their community as experts on the intricacies of Jewish law, rabbinic authorities are moreover routinely consulted for interpretations of the law to determine whether a food is permissible within the law as well as consistent with community custom. Lastly, at the local level, when it comes to decisions outside of personal households, communities that seek out Kosher products will rely on additional institutions to ensure the credibility of Kosher claims beyond an individual or organization’s self-declared statements. While the rabbis interpreting and codifying the laws of Kashrut grant that one individual may be deemed trustworthy in matters pertaining to his or her own observance, they also explicitly acknowledge the potential problem of a conflict of interest for an individual to serve as his own enforcement authority when other individuals (and interests) are involved. A business owner—producing ingredients or food for consumption by others—cannot be relied upon in principle because his own 78
The perception of a given individual as “trustworthy” is not static. Observations of an individual’s outward appearance might form the basis of initial perceptions of trustworthiness, which can evolve and change based on new information. Community members, moreover, test their initial presumptions of trustworthiness; they “retain the right to question.” Community norms deem acceptable the behavior of walking into another person’s home or business and inquiring about their level of Kosher observance. Individuals will then decide to eat from the kitchens of those deemed trustworthy upon further inspection. Likewise, shirking individuals will not remain perceived as trustworthy for long. Author’s interview with Rabbi Zalman Bluming, 20 September 2010. 79 This is consistent with Ostrom’s (1990) work demonstrating that smaller communities have greater social capital and have a greater ability to enforce their own rules and impose sanctions. 80 Shapiro 1961. 81 In Muslim communities, the Imam will assume a similar role. See Waarden and Dalen 2010. Published by Berkeley Electronic Press, 2010
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personal interests are at stake.82 A separate individual is required to assure the validity of something which a private individual might have self-interest to conceal. Thus, traditionally, verifying the Kosher status of a given food or an establishment serving food requires onsite supervision by a recognized authority—a third party inspector called a mashgiach—to monitor that the ingredients chosen and procedures used in food preparation are in accordance with Jewish dietary laws.83 In this manner, the mashgiach operates akin to other third party auditors, whose “independent” overseeing presence deems credible the claims made about products produced under his supervision. However, unlike inspectors employed or contracted by other third party certifying organizations, Kosher inspectors are not anonymous individuals whose identity remains unknown to end-consumers. Personal identity plays center stage in determining one’s suitability for the position of mashgiach. Individuals must also have the requisite expertise (knowledge of Kosher of law, community customs, and training); moreover, they must be known to be trustworthy within their communities—that is, visibly observing laws and customs. Thus, at a local level, there is more at play than simply the independence of the mashgiach in bolstering the credibility of Kosher. Rather, the inspector himself is bound to the community—which has entrusted him to ensure that Kosher standards are upheld in a manner consistent with the level of stringency expected by the community. In other words, a radius of trust extends from the community to encompass the mashgiach and that which he oversees. There is, however, a delicate balance between where “trust” and close ties enable the creation of robust networks (cooperation and coordination leading to greater efficiency and lower transaction costs) versus where these close ties, if left unchecked, can translate into patron-client relationships, imbalanced power dynamics and further downward spiral into collusion, nepotism, rent-seeking, and corruption. Just as trust may be extended to the local inspector—empowering him in his position—so too can this trust then be retracted. Third party certifiers (i.e., the mashgiach and the agencies they work for) that claim to adhere to strict standards while behaving with negligence, can be readily sanctioned by their communities, incurring negative reputational impacts, ostracism and even expulsion, depending on the severity of their actions. Clear evidence of such 82
Applying the concept of nogeiah b'davar (personal benefit) by virtue of inherent conflict of interest, another witness is required to verify the claims made in the case where someone has a personal interest at stake. Personal communication with Rabbi Shmuly Yanklowitz 15 July 2010. 83 A mashgiach may be either a rabbi, or another person appointed or approved by a rabbi; the responsibility rests on the mashgiach to prevent violations of Kosher laws. This is done through the inspection of meat slaughterhouses, butcher shops where Kosher meat is sold, and restaurants intending to prepare and serve Kosher food. http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322
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sanctioning mechanisms at work can be observed in the orthodox Jewish world’s response to the 2006 Kosher chicken scandal in Monsey, New York. Upon discovering that a butcher had made false claims about the chicken that he labeled and sold as Kosher in a local Kosher grocery store, community members, local leaders and even uninvolved certifying agencies were exchanging information through their networks to understand the facts of the event as well as how to respond in its aftermath. Almost immediately following their discovery of the reported violation, store owners banned the butcher from the grocery store, “…leaflets lined [the store’s] windows, telling patrons in Hebrew that [the butcher] had been caught selling non-kosher chicken. At synagogues and on the street, rabbis instructed the faithful to throw out the meat and cleanse their kitchens to make them kosher again.”84 News of the scandal quickly reached beyond the small ultra-orthodox community in Monsey to the discussion pages of Jewish online blogs and the news alerts of many Kosher certifying agencies. According to a New York Times article: The matter has been the talk of Jewish Web logs. One of them, Vos Iz Neias, announced it under the banner headline “Butcher Sells Treifa Chicken as Kosher.” (Nonkosher food, or food that is not in accord with Jewish dietary laws, is called treif, which derives from the Hebrew word teref, or torn.) The posting generated 440 comments in two days.85 Such a robust and widespread community response in the event of a scandal demonstrates the overall enforcement potential for the Kosher system beyond the formal institutional elements put in place by certifying agencies. Community members and consumers alike were involved in the feedback mechanism to ensure rapid dissemination of information and response to the reported incident. Thus, at the local level, trust, community norms, and ongoing relationships serve as the glue that binds together both authorities within the agency network as well as individual consumers and communities external to the certifying agencies. In essence, as a means to thwart those seeking to exploit their trusting relationships, these tight-knit communities leveraged the positive benefits of their constant connectivity—that is, their reserves of social capital—to further enforce sanctions on violators. In short, at the local level the credibility of third party certification in the case of Kosher was a result of the combination of a subset of consumers that are well educated to the rules of Kosher, well organized into groups (e.g., through community organizations like synagogues and schools), and interact frequently 84 85
Santos 2006. Santos 2006.
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with one another through community institutions and daily life. Moreover, transparency mechanisms manifested by information disclosed on the websites of certifying agencies, in directories created by other non-profit community organizations, and on blogs helped to keep individual consumers and community leaders updated on the status of Kosher products and the agencies overseeing them. This additional layer of monitoring provided by educated consumers and communities outside the agency network has kept the Kosher certifying institutions in check. 4.2 Transcending Local to Global Scale: Kosher Institutional Arrangements At the local level, tight-knit networks have thus long functioned as a relationshipbased (i.e., word of mouth) communications infrastructure, assuring the rapid transmission of and response to credible information among individuals and communities locally engaged in the production and supervision of Kosher food destined for community consumption. However, in a global food supply chain, the increasing complexity of ingredients and additives in processed foods makes Kosher verification much more difficult, especially distinguishing ingredients derived from restricted animals or other sources that would likewise be prohibited. Discerning the true origins of ingredients and verifying their suitability, in addition to inspecting the processing plants for agricultural or food products and the retail establishments represent ongoing challenges for Kosher inspectors (mashgichim) working within the global Kosher industry.86 In the global food supply chain, however, where local supervision may only be available for a few steps in the chain, rabbinical authorities have needed to devise alternative institutions to ensure (1) that the Kosher standards that they certify remain consistent and trustworthy and (2) that the consumers receive the appropriate information required to decide if a given good is acceptable for consumption. Indeed, the high value placed on information locally has been extended to the global context, with consumers shifting their attention to Kosher labels. Given the globalization of the food supply, Kosher food labels have become essential sources of information for Jews seeking to keep kosher just as food labels like the Marine Stewardship Council (MSC) allows people to buy fish that has been harvested through sustainable practices. The information provided through such labels is necessary for strictly observant Jews to function in everyday life, 86
Similarly, consumers of Halal foods have struggled with unreliable claims and verifying the credibility of information in more complex food supply chains. In the introduction to their article, Waarden and Dalen (2010) share the story of pork kebabs being sold in Europe, marketed as Halal.
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especially given the ever-increasing complexity of ingredients in processed food. The use of labels with detailed information about the harvesting, slaughtering, or processing techniques used also has an additional advantage. Although the specific information implied by the labels is not necessarily of interest to the "average consumer," many other consumers use the “Kosher” label as an important informational signal in their purchasing decisions, though apparently for different reasons, as noted above. What is it about Kosher third party certification (and associated labels) that makes it credible not only at the local level but also as a global institution? The credibility of global Kosher institutions is fundamentally linked to that of local Kosher authorities and ultimately the communities relying upon them. In essence, local institutions undergird certification at the global level for Kosher, thereby making the third parties credible. Thus, rabbis overseeing Kosher labels internationally share the expertise and backgrounds of their local counterparts in the consuming communities; the sources of their expertise are also readily knowable via community connections. With the name of the overseeing rabbis displayed prominently in the documents of the certifying agencies as well as in some cases on the label itself, consumers can verify for themselves whether they deem the rabbi to have sufficient expertise. In addition, because Kosher labels are grounded within the close-knit social web of religious communities, consumers are willing to trust the participating institutions (i.e., their own rabbis and the certifying rabbinical authorities) to provide credible information about the maintenance of standards in accordance with Jewish law. If consumers prefer not to rely simply on the information provided via institutional mechanisms, they can moreover consult someone whom they trust—their own local rabbi—for a further assessment of a rabbi or certifying agency’s trustworthiness and expertise. Figure 1 illustrates how these nested layers of local to global oversight provide valuable ongoing feedback mechanisms in the Kosher supervision of the global food supply chain. Below we elucidate the mechanisms that facilitate the credibility of those third parties certifying Kosher food products at the global level.
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A. B. C. D. E.
F. G.
Certifying Agency. Inspector from certifying agency or network verifies ingredients. Inspector from certifying agency ensures cleanliness of shipping containers for ingredient distribution to prevent contamination. This may also occur during product shipping. Inspector from certifying agency visits product manufacturing facilities. Retailers may have onsite inspectors verifying food for store shelves or for preparation in restaurants. Statement placed in window with name/label from overseeing agencies and individual supervisors. Consumers use own knowledge to verify credibility of retailer and individual items and gather information from posted certificates, labels and observable attributes/behavior. Local authorities serve as additional point for verification where consumers/retailers uncertain of information.
Figure 1 Third Party Monitoring and Oversight in the Global Food System Note: Figure shows key points of oversight institution to provide monitoring, feedback, and viable information pathway to mitigate potential “harm” to end consumer. The underlying figure (in gray) describing “causal steps to import safety problem” is based on Coglianese et al (2009).
First, even at a global level, the Kosher certification scheme still relies on the legitimacy of leaders from adherent communities, who are considered to have the appropriate expertise and authority to rule on matters pertaining to Kashrut, as well as the power to enforce their rulings. Rabbis deeming a product, process, or http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322
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organization (e.g., a restaurant) kosher must include their name in associated labels, certification documents, and public communications—risking their own reputation if the product is somehow found inconsistent with kosher requirements. The legal authority of overseeing rabbis and those rabbinical courts staking their reputation on the credibility of the certification is further re-enforced by community social norms and the continual involvement of communities and individuals using the certification. Different communities regard different rabbinical authorities as more or less valid, and, therefore, discern the suitability of products and vendors based on the identity of the certifying third party. For example, some might only accept the Kosher stamp of approval given by the Orthodox Union (OU), whereas others might only accept certification by StarK—another one of the most recognized Kosher labels on the market. Still others might prefer two Kosher labels—one from a credible international certifier like OU supplemented by a more locally known source like the region’s Vaad rabbis—to assure the trustworthiness and expertise of the overseeing rabbis can be even more readily discerned. The label, thus, serves as a key source of information—not just about the food product but also about the credibility of that substantive information. Kosher labels thus facilitate decision making at the point of purchase and reduce the time at the grocery store (i.e., the information search costs) associated with making decisions consistent with one's values (in this case, religious values). Second, the fact that global Kosher labels remain grounded within local community authorities and institutions is an important component of Kosher, in contrast to other third party-certified labels. Even in the face of label proliferation worldwide, Kosher labels thus offer important navigation assistance to consumers searching for credible information. While there is no one universally credible Kosher super-label, there are a handful of labels which are very common and internationally known and thus easily recognizable by consumers, including: the cRc, Kof-K, OK, OU, and Star-K.87 Beyond the few widely known labels, there are hundreds of other labels88 making Kosher claims and more than a thousand certifying agencies worldwide.89 While the sheer number of certifying agencies and labels might seem overwhelming and confusing, religious communities distinguish between the labels they know and recognize, i.e., consumers would generally know the internationally known labels and the ones that are locally 87
For details, see: http://www.crcweb.org/kosher; http://www.kof-k.org/; www.ok.org; www.oukosher.org; www.star-k.org. 88 The Kosher Supervision Guide, a comprehensive international directory of Kosher certifying agencies, currently lists nearly four-hundred different certifying agencies, each with its own distinct symbol, See: http://www.kashrusmagazine.com/ksg/Old%20and%20deleted/ksg_index.html. 89 Chicago Rabbinical Council, http://www.crcweb.org/agency_list.php. Published by Berkeley Electronic Press, 2010
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verified in their area. Where there is a question or unfamiliar label on food packaging (a typical occurrence when travelling), consumers can refer to the information provided by reputable certifying agencies or rabbinical authorities, consult a plethora of online resources, or contact their own rabbi for further consultation. Because organizations involved in Kosher supervision are fully embedded within their user communities and, likewise, understand their role in providing a public good, certifying agencies strive to minimize consumer confusion and facilitate information dissemination. Rather than encouraging consumers to depend solely on their labels as a source for credible information, a few certifying agencies and other civil society watchdog organizations, moreover, encourage fuller transparency—by providing consumers with information they can cross-reference with that of external authorities or their own private information. The independently published Kosher Supervision Guide, for example, has for 25 years made publicly available a directory of all known Kosher symbols (nearly 400 as of 2010), including contact information for the certifying agency as well as the name of the overseeing rabbi. By providing the contact information for certifying agencies, images of associated Kosher symbols affixed on products, and further background information on overseeing rabbis (e.g., number of years working as a certifier, education and training credentials, geographic areas of operation), directories like the Kosher Supervision Guide help consumers to circumnavigate bureaucracies and get second opinions more easily. Combined these not only add an additional layer of transparency and oversight but also enhance the certifying agencies’ perceived trustworthiness.90 By willingly disclosing key information, certifying agencies and watchdog organizations help to bolster the credibility of Kosher labels—by easily enabling further verification should other organizations or individuals so choose. However, further layers of verification might be seen to reduce the efficiency gains made by Kosher labels in conveying information, since some consumers might absorb further search costs by consulting with additional authorities. The Chicago Rabbinical Council (cRc) goes a step further than these general online directories—which offer transparency without specific endorsements. The Chicago Rabbinical Council—certifier of the internationally recognized cRc Kosher label—offers as a “public service” a comprehensive list of “common 90
Online directories and other Kosher consumer services are offered as a courtesy to consumers and are paid for by the organization providing them. While such high-touch customer service might appear to represent a high-cost addition to certification, such services are regarded as an essential ingredient to maintaining a credible operation. The associated costs are bundled up in the overall certification price paid for by businesses. Given the economies of scale associated with large companies producing for global markets, the price of certification is recovered via expanded market access; thus, Kosher consumers can have their Oreo cookies, without necessarily paying more on the margins for the additional Kosher stamp. Author’s personal communication with Rabbi Yosef Blau, 16 July 2010.
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acceptable kosher symbols” and the contact information for other certifying agencies and labels they recommend as credible.91 In doing so, the Council creates a reputational linkage between its own Kosher label—cRc—and other Kosher labels the agency deems credible. Whereas many certifying agencies provide information relevant to only their own labels on their website and other publications, the Chicago Rabbinical Council is unusual in its willingness to risk its own reputation by publicly attesting to the credibility of other labels and agencies. Endorsements such as this further increase the available information and reduce the search costs for consumers. Third, like Kosher locally, the global system relies on the close-knit nature of religious communities who share common customs, traditions and education. As is characteristic of close-knit communities, they have accrued high levels of social capital necessary to enable effective collective action.92 Both locally and globally, information transmits quickly via word of mouth and through internet venues like news alerts, websites, email and blogs. Thus, sanctions can readily be imposed on those violating community norms—even over great distances. The above-mentioned chicken scandal in Monsey, New York appeared not only in web logs in the United States but in other countries and on international agency sites. In a matter of days after the event, the Israeli newspaper Haaretz featured an excerpt about the scandal.93 Simply put, the networks that exist among communities with similar values and beliefs allow for the rapid transfer of information and sanctioning. In addition to news alerts published by individual Kosher certifying agencies with updates pertaining to their own labels (i.e., new products, false claims, revoked or altered certification status), there are many dedicated media outlets, independent websites, directories, blogs and even hotlines which keep the dedicated consumer updated on new certified products. These media sources also provide information about unreliable claims or organizations that have lost their Kosher seal of approval. Another free online resource, Kosher Quest94 provides consumers with a comprehensive database of (some 30,000) Kosher products from numerous certifying agencies, which can be searched by product type, manufacturer, as well as certifying agency. Of particular interest with Kosher Quest is the prominent presence of a “Kosher Alerts” section that regularly publicizes unreliable and false claims appearing on products from a variety of certifying agencies as well as updates on restaurants or other establishments who misrepresent their Kosher status (or fail to pass an audit).95 Beyond websites with 91
Chicago Rabbinical Council, http://www.crcweb.org/agency_list.php. Ostrom 1990; Greif 2006. 93 Shamir 2006. 94 Kosher Quest, http://www.kosherquest.org/. 95 Kosher Quest, http://www.kosherquest.org/alerts.php. 92
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searchable databases or news alerts, there are even hotlines to address specific consumer concerns. If consumers have a question or concern about an unfamiliar product or suspicious label, they can readily dial a phone number and speak with a rabbi with the requisite expertise to advise them. Such Kosher consumer services not only exist but people actually use them.96 Lastly, a community of vigilant citizen-consumers lowers enforcement costs for third party certifiers as well. Tips provided directly to the certifying agency by vigilant consumers help bolster their credibility by reducing the time delays associated with identifying and responding to errors.97 With such transparency and feedback mechanisms in place—supported by an active consumer base—false claims can, furthermore, be rapidly identified, publicized, and sanctioned. According to one source, there is zero tolerance for error.98 Owing to the religious importance of maintaining Kashrut, many kosher-abiding consumers want to see harm prevented before it happens. Businesses experiencing an incident may need to not only change their behavior but also switch certifying agencies in order to retain their market in the future. Larger certifying organizations, however, may weather scandals more easily than smaller, local ones.99 5. Implications For those concerned with providing a genuine product to consumers consistent with their values—be it ethics of animal welfare, assurance of environmental responsibility or adherence to Jewish dietary laws—labeling schemes must efficiently transmit credible information between producers and consumers. We have used the case of Kosher to elucidate the mechanisms at work that enable third party certifiers bolstered by activist monitoring and enforcement to provide credible information to consumers. 96
Author's interview with Rabbi Zalman Bluming, 18 July 2010. In his interview, Rabbi Bluming indicated that he and his peers (other rabbis) utilized these hot-lines to consult on Kosher questions. This perspective was, moreover, substantiated in interviews with other experts on Kashrut. These customer services are provided by many well-recognized Kosher labels and are paid for by businesses pursuing certification (i.e., it is bundled in the overall fees businesses pay for certification). 97 This can be contrasted against what appear to be incredible time delays in discovering and disclosing to the public vital information pertaining to food safety, as was the case with salmonella concerns leading to the massive recall of eggs in August 2010. States became aware of the potential problem of a salmonella outbreak in May yet widespread announcement and a product recall began only in August. See Neuman 2010. 98 Author’s interview with Rabbi Zalman Bluming, 18 July 2010. 99 Author’s personal communication with Rabbi Yosef Blau, 16 July 2010. http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322
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As such, there are several explicit implications that can be drawn from the Kosher case for (1) understanding the credibility of third party certifiers generally; (2) carving out a space for society in the certification process; and (3) assessing the impact of third party certification schemes on small-scale communities and producers seeking access to markets in developing countries. First, for a certifying agency to attain and retain credibility, it must demonstrate clearly to the public the sources of its expertise and trustworthiness. Expertise in the case of Kosher can more easily be distinguished within close-knit communities where not only training can be readily uncovered but also entire personal histories and family trees. In Kosher, ostracism mechanisms and the publicizing of false claims exemplify such transparency measures. Ongoing relationships are especially useful in ensuring that credible reputational threats can be made and enforced at both the local and global scale. Moreover, positive externalities may be created from this expanded radius of trust—as the public good created by oversight agencies and a community of vigilant citizenconsumers can serve as an enforcement mechanism that helps to minimize shirking more broadly across the global food commodity chain. In the absence of active consumer participation and social networks linking producers with consumers, errors (and their associated harms) are more costly to locate and address before they magnify. The case of Kosher thus indicates that credibility does not have to come at a huge financial cost if transparency mechanisms are in place and social capital is readily available. Second, pertaining to carving out a role for civil society, the transition of Kosher from a local institution to a global label demonstrates the role of social capital for enhancing credibility in the certification process. Active citizens and tight-knit communities represent essential mechanisms for supplementary oversight and the delivery of credible information to consumers in a privately monitored global supply chain. High levels of social capital are needed to create the public good of tertiary oversight—that is, an additional layer of monitoring provided by vigilant, active citizens who are organized into strong communities and capable of obtaining, transmitting and responding rapidly to new information, and ultimately enforcing sanctions on violators. Moreover, unlike most third party certifiers elsewhere that are able to hide behind their veils of anonymity, Kosher authorities are not outside the public eye and can be readily sanctioned should they fail to fulfill their role. The credibility of third party certifiers, as a result, resides not in their cloaked “independence” but rather in their transparency. Without transparency, both civil society and individual consumers lack the information requisite to evaluate the expertise and trustworthiness of certifying parties and their associated labels. Third and finally, understanding the credibility dilemma faced by Kosher consumers and producers provides additional insights into the impact of third
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party certification schemes on communities and small-scale producers seeking access to markets in developing countries more broadly. While “costliness” (at least in a financial sense) may denote a signal of credibility, its centrality to discussions of third party credibility in the literature obscures an underlying, paradox for poor, marginalized producers. Third party certification (e.g., Fair Trade and Organic) is frequently suggested to such producers as a solution to their inability to convey reliable information and to their lack of consistent market access. However, because of the way credibility has typically been measured— by the criteria of cost and independence—such producers often get left behind. The costliness of credibility (i.e., a “pay to play” approach), indeed, represents one opportunity cost associated with third party certifications; with scarce resources available, producers must choose between competing efforts to improve their chances of economic success. For many farmers in marginalized communities, third party certification fails to build upon and integrate local institutions—social capital and strong community networks within producer communities. It therefore cannot provide a low cost mechanism for sanctioning. For poor farmers to benefit from schemes like Organic and Fair Trade,100 building upon their social capital instead of demanding additional layers of costly certification might, in fact, offer untapped opportunities for them to opt in rather than opt out. References Arndt,
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The Fair Trade movement recently introduced a complementary institutional model to address the potential exclusion of marginalized producers previously left out of Fair Trade certification due to either high transaction costs or general lack of access. http://www.bepress.com/bap/vol12/iss3/art8 DOI: 10.2202/1469-3569.1322
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Article 9
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Can Technological Innovations Improve Private Regulation in the Global Economy? Graeme Auld, Carleton University Benjamin Cashore, Yale University Cristina Balboa, Baruch College, City University of New York Laura Bozzi, Yale University Stefan Renckens, Yale University
Recommended Citation: Auld, Graeme; Cashore, Benjamin; Balboa, Cristina; Bozzi, Laura; and Renckens, Stefan (2010) "Can Technological Innovations Improve Private Regulation in the Global Economy?," Business and Politics: Vol. 12 : Iss. 3, Article 9. Available at: http://www.bepress.com/bap/vol12/iss3/art9 DOI: 10.2202/1469-3569.1323 ©2010 Berkeley Electronic Press. All rights reserved.
Can Technological Innovations Improve Private Regulation in the Global Economy? Graeme Auld, Benjamin Cashore, Cristina Balboa, Laura Bozzi, and Stefan Renckens
Abstract Those supplying private regulation in the global economy face two fundamental challenges if they are to ameliorate the problems for which they create these systems: targets must conform to, while demanders must have proof of, regulatory compliance. This paper explores an important area absent from assessments as to whether, when, and how, private regulatory bodies are successful in improving behavior and rewarding compliant firms: the role of technological innovations. Employing an inductive, comparative case study analysis, we offer an analytical framework that distinguishes technological innovations that improve tracking mechanisms from innovations that directly improve on-the-ground performance. We illustrate the utility of the analytical framework through an assessment of technological innovations in shaping “non-state market driven” global certification programs governing forestry, fisheries, coffee, e-waste, and climate. KEYWORDS: private governance, NSMD governance, certification, private authority, regulation Author Notes: Graeme Auld and Benjamin Cashore are equal lead authors. Auld is Assistant Professor at the School of Public Policy and Administration, Carleton University; he can be reached via email at
[email protected]. Cashore is Professor of Environmental Governance and Political Science at the School of Forestry and Environmental Studies, Yale University; he can be reached via email at
[email protected]. Cristina Balboa is Assistant Professor in the School of Public Affairs, Baruch College, City University of New York. She can be reached via email at
[email protected]. Laura Bozzi is a Ph.D. student at the School of Forestry and Environmental Studies, Yale University. She can be reached via email at
[email protected]. Stefan Renckens is a Ph.D. student at the School of Forestry and Environmental Studies, Yale University. He can be reached via email at
[email protected]. The authors thank Tim Büthe, Jan Pierskalla, David Brady, Cory McCruden, two anonymous referees, and participants of the October 2009 “Private Regulation in the Global Economy” workshop at Duke University for their constructive feedback on and contributions to earlier versions of this paper. We thank Shelby Semmes and Ian Starr for research support.
Erratum On November 22, 2010 the acknowledgment was updated. Originally the acknowledgment read: "Graeme Auld and Benjamin Cashore are equal lead authors. Auld is Assistant Professor at the School of Public Policy and Administration, Carleton University; he can be reached via email at
[email protected]. Cashore is Professor of Environmental Governance and Political Science at the School of Forestry and Environmental Studies, Yale University; he can be reached via email at
[email protected]. Cristina Balboa is Assistant Professor in the School of Public Affairs, Baruch College, City University of New York. She can be reached via email at
[email protected]. Laura Bozzi is a Ph.D. student at the School of Forestry and Environmental Studies, Yale University. She can be reached via email at
[email protected]. Stefan Renckens is a Ph.D. student at the School of Forestry and Environmental Studies, Yale University. He can be reached via email at
[email protected]. The authors thank Tim Büthe, Andrew Bell, David Brady, Cory McCruden, two anonymous referees, and participants of the October 2009 “Private Regulation in the Global Economy” workshop at Duke University for their constructive feedback on and contributions to earlier versions of this paper. We thank Shelby Semmes and Ian Starr for research support."
Auld et al.: Can Technology Improve Private Regulation in the Global Economy?
1. Introduction Those supplying private regulation in the global economy face two fundamental challenges if they are to ameliorate the problems for which they create these systems: targets must conform to, while demanders must have proof of, regulatory compliance.1 Although important scholarly research has improved our understanding of these issues by focusing on the emergence of private regulation,2 prospects for long-term institutionalization3 and standards development,4 we explore an important issue left unattended by this literature: the role of technological innovations in nurturing global private regulation. Technology as a driving force in political, social and economic life has long received scholarly attention. However, we are not aware of any scholarship that applies this lens to the emergence and potential of private regulation. Such an oversight is problematic for two reasons. First, technological innovations can improve the mechanics of private regulation, including supply chain tracking which, we reveal below, provides the demarcation of political communities necessary for these systems to gain authority and legitimacy. Second, technological innovations can improve compliance with the on-the-ground performance requirements of private regulation. Yet just how technology plays a role in shaping these systems and possibly solidifying private authority remains poorly understood. Our aim is to begin filling this gap by identifying analytical tools for assessing the causal relationships between technology and private authority. We inductively explore the emergence and evolution of “non-state market driven” (NSMD) certification systems in the forest, fisheries, coffee, electronic waste, and climate-mitigation sectors to illustrate the utility of our analytical framework and to identify preliminary findings and patterns with which to orient future research. These global certification systems are the focus because they represent leading efforts to promote compliance through supply chain tracking and because they are, arguably, the furthest away from public authority in comparison to other cases reviewed in this special issue. Moreover, at the heart of struggles to build NSMD governance rest broader attempts to address the negative consequences of neoliberal globalization, which, it is asserted, frees multinational firms from inconvenient national regulation while discouraging countries seeking foreign investment and trade from enacting and/or enforcing social or environmental standards.5 Recognition of this objective is important for this paper, as an array of sophisticated literature has 1
Büthe 2010a. Bartley 2007. 3 Bernstein and Cashore 2007. 4 McDermott, Noah, and Cashore 2006. 5 Braithwaite and Drahos 2000; Bernstein and Cashore 2004, 279. 2
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revealed that technological advances often significantly accelerate the pace and scale of economic globalization’s impact on many environmental and social challenges.6 Technological innovations often make natural resource extraction more efficient, opening new areas to exploitation or allowing extraction rates to exceed biological limits.7 Intensification of agricultural practices has likewise raised concerns due to possible negative ecological, human health and environmental consequences.8 Yet these same technological innovations can play a countervailing role in limiting the impact on the environment, human health, etc. Cell phones, for instance, may contribute to the original problem because mining and industrial activities are necessary to produce them, but once produced they can help foster certification tracking or reduce compliance costs in meeting environmental and social regulations. Understanding better cumulative and countervailing effects requires unpacking these distinct causal processes and theorizing about how precisely they matter. Since tracking is such a key part to the success and impact of NSMD certification systems, our focus offers a valuable set of cases with which to understand the role of technology in shaping private authority in general and potentially improving the ability of these initiatives to ameliorate pressing global problems. This inductive effort uncovers three key insights. First, technologies can shape problem definitions because their successful use focuses attention on issues they are well suited to solve. Second, and as a consequence, such a focus can change and shape coalitions of support for private regulatory institutions. While we review the problematic ways technologies can sometimes narrow policy efforts towards tractable problems, the possibility that this may nurture winning coalitions in favor of broader compliance with environmental and social standards focuses our attention, as we elaborate in the conclusion, towards the evolutionary pathways on which private regulation may be headed. Third, the role of NSMD certification in fostering learning across disparate interests can lead private regulatory institutions to serve as incubators for technologies that may, in turn, improve or transform government regulations. This means, as our climate case reveals, that the interaction of public and private authority is profoundly important, but largely under-theorized. 6
Speth 2008. The impact on our daily lives of the technological revolution in general, and IT in particular, of the last quarter of the 20th century is undeniably strong. Asserted benefits include greater global communication, access to information and heighted transparency. Yet environmental problems have emerged in parallel, including environmental and human health impacts associated with hazardous wastes (lead, mercury, cadmium, and flame retardants) and resource depletion due to intensive use of water, energy and other resources in production processes. Grossman 2006; Kuehr and Williams 2002. 7 Pauly et al 2003. 8 Krkosek et al 2007; Rice and Ward 1996; Greenberg et al 1997; Perfecto et al 1996; Luttinger and Dicum 2006; Rama and Jaga 1992; Wesseling et al 1999. http://www.bepress.com/bap/vol12/iss3/art9 DOI: 10.2202/1469-3569.1323
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The remainder of the paper proceeds in the following parts. Part II reviews key features of global NSMD certification systems that identify their similarities and differences from other forms of private regulation reviewed in this issue and which justifies our empirical focus on them. Part III provides an inductive analytical framework that is sensitive to disentangling complex causal arrows through which technology exacerbates and/or ameliorates environmental and social problems. Part IV applies the framework to probe relevant technologies governing the sectors under review. Part V reflects on the key trends, insights and questions that emerge. We then conclude by theorizing and reflecting more broadly on the implications of our inductive comparison for the reciprocal relationship between public and private arenas as incubators and drivers of technological innovations that can advance efforts to ameliorate global problems. 2. Private Authority and Non-State Market Driven (NSMD) Global Certification In the last 15 years a range of “non-state market driven” (NSMD) global certification systems have emerged that share some features with, but are also distinct from, other forms of private regulation examined in this issue. Much of the “supply” of these systems can be traced back to a number of nongovernmental organizations (NGOs), who, frustrated with their limited influence over governmental and intergovernmental processes, began to develop their own sets of socially and environmentally responsible business regulation. They developed systems to reward firms that accepted these standards, often by creating social or environmental “labels.” Their idea was that by certifying and tracking responsibly produced goods through complex supply chains9 they could provide firms—the regulatory targets—economic “carrots” through market recognition for their responsible business practices. This form of private regulation has been advanced to tackle some of the most important problems associated with resource management10 and industrial production processes,11 including fisheries depletion, forest degradation,12 ecosystem fragmentation, pollution, electronic waste,13 and climate change.14 Notable programs include Fairtrade Labelling Organizations International (FLO),15 the Forest Stewardship Council (FSC),16 the Marine Stewardship 9
Cashore 2002. Auld, Bernstein, and Cashore 2008. 11 Bartley 2003; O'Rourke 2003. 12 Cashore, Auld, and Newsom 2004. 13 Renckens 2008. 14 Levin, Cashore, and Koppell 2009; Green 2010. 15 Fridell 2007. 10
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Council,17 and the US Green Building Council.18 This model is proliferating at a dizzying rate, with recent examples including efforts aimed at reducing emissions from trucking and for promoting investment in climate bonds. The impact of these systems is far from trivial—if completely successful, current efforts alone would govern twenty percent of products traded globally.19 Cashore,20 Cashore, Auld and Newsom,21 and Bernstein and Cashore22 have discerned key features that together reveal NSMD systems’ similarities and differences from other forms of public and private authority. One feature, shared in varying degrees by broader forms of private authority,23 is that governments do not require adherence to the NSMD rules. As Cashore takes care to note, governments are involved in many important ways as procurers, financial supporters, and even conveners of standard-setting processes.24 But what is key is that the sovereign authority that governments possess to develop rules to which society more or less adheres does not apply. No one can be incarcerated or fined for failing to adhere to the rules. This means that supporters of such systems must work to develop alternative sources of authority with which to create obligations and compel support.25 The existing scholarship that identifies conditions that might enable NSMD systems to achieve “political legitimacy” through normative and/or strategic pathways has thus far failed to examine the important role technology has, as we discuss below, in fostering such support. A second feature, fundamental to our inquiry below, is that NSMD rules clearly specify particular on-the-ground behaviors that profit-maximizing firms must undertake to address social or environmental externalities of their operations. In other words, NSMD systems pursue prescriptive “hard law”, albeit in the private sphere.26 This focus on regulating externalities distinguishes NSMD systems from other arenas of private authority, such as coordination over essential components of electrical systems and similar technical standards (the original reason for the creation of the International Electrotechnical Commission and then the International Organization for Standardization), in which the rationale for 16
Cashore et al 2005. Kaiser and Edwards-Jones 2006. 18 USGBC 2005; Bernstein and Cashore 2007. 19 This figure was derived from World Trade Organization 2003 and a list of NSMD programs compiled by Bernstein and Cashore 2007. They divided the total amount of products traded under sectors with NSMD programs by the total amount of all products traded globally. 20 Cashore 2002. 21 Cashore, Auld, and Newsom 2004. 22 Bernstein and Cashore 2007. 23 Büthe 2010a. 24 Cashore 2002. 25 Bernstein and Cashore 2007. 26 Meidinger 2006. 17
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support follows a different logic.27 Similarly, NSMD systems differ from voluntary environmental management system (EMS) approaches in which firms are certified for developing internal procedures, but which develop no prescriptions about on-the-ground behavior.28 EMS systems, and particularly ISO 14001, give firms discretion to decide what they want to do to ameliorate environmental or social problems. The United Nations Global Compact is a further example of an initiative that advances general and abstract principles instead of specific behavioral requirements. Although developing management systems can be costly, NSMD systems impose on-the-ground costs by developing prescriptive rules guiding specific operational practices to which firms’ behavior must adhere. It is for these costs, therefore, that countervailing benefits must be provided. This relationship reinforces our emphasis on technological innovations that might reduce the costs of complying with such prescriptive requirements. Technological innovations that make it easier for firms to abide by performance standards may hold promise in encouraging more firms to support, and comply with, NSMD global certification systems. A third feature critical to NSMD systems is the existence of verification procedures designed to ensure that any regulated entity that seeks reputational or material benefits from claiming compliance actually meets the stated standards. Verification is important because it provides the validation necessary for a certification program to achieve legitimacy, as certified products or services are then demanded and consumed along the market’s supply chain. This distinguishes NSMD systems from many forms of corporate social responsibility initiatives that require limited or no outside monitoring.29 Verification or auditing of compliance can be challenging and costly, involving field visits by experts, significant paperwork, and follow-up to ensure practices continue. This feature reinforces the need to assess the important role that new technologies might play in improving these processes and possibly reducing costs for smaller or marginalized producers that may otherwise not be able to participate due to the cost and logistical barriers verification procedures present.30 A final critical feature is the focus on enabling and fostering the community of “demanders” through the market’s supply chain. This can occur through boycotts and other direct action initiatives meant to convince large retailers to adopt purchasing policies favoring NSMD certification systems, and which then place pressure on suppliers to support such systems. Hence, the market’s supply chain serves as the institutional arena in which evaluations over 27
See Büthe 2010b; Büthe and Mattli 2011. Clapp 1998; Delmas 2002. 29 Gunningham, Grabosky, and Sinclair 1998. 30 For discussion of these barriers see Auld, Gulbrandsen, and McDermott 2008; Mutersbaugh 2005, 2008; Ponte 2008; and Starobin and Weinthal 2010. 28
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support occur and through which tracking systems are required to ensure that labeled products are produced by compliant firms. This tracking matters because consumer support for certified products requires the development of mechanisms to ensure consumers are actually purchasing products that are certified to, and in compliance with, the NSMD performance standards. The most dominant mechanism for accomplishing this occurs by tracing products from producer to end-consumer and even through the process of recycling and disposal. This tracking, in turn, delineates the “political community”31 of environmental and social groups, firms, governments, and other stakeholders that attempt to promote, develop, and shape NSMD governance in a particular sector. Table 1: Select Features of NSMD Global Governance Role of the state
State does not use its sovereign authority to directly require adherence to rules
The social domain
Development of prescriptive rules governing environmental and social problems to which firms must adhere
Enforcement
Compliance must be verified
Role of the market
Support emanates from producers and consumers along the supply chain who evaluate the costs and benefits of joining Signals of support and compliance are fostered through “tracking” of certified products from producers to consumers and through disposal
Adapted from Cashore 2002, Cashore, Auld, and Newsom 2004 and Bernstein and Cashore 2007.
To be sure, the above classification system represents an ideal type; the precise fit of it will vary across time and sectors. Nonetheless, this effort does reveal how the class of NSMD global certification systems, with their focus on very specific on-the-ground behaviors, auditing for compliance, and tracking products through global supply chains, render them excellent cases for assessing the role of technological innovations in improving the operation and effectiveness of private regulation. Likewise, such a focus highlights a “chicken and egg” dilemma in which profit-seeking firms (the regulatory targets) require a market benefit before undertaking costly requirements of NSMD certification systems, while “demanders” expect to see guarantees of behavioral change before providing the market benefit, such as purchasing eco-labeled products.32 Hence a 31 32
Bernstein and Cashore 2007. Bernstein and Cashore 2007.
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focus on technology is useful because it may lessen this dilemma by both reducing the costs of compliance and by also making the label more credible, potentially helping to overcome the sequencing problem that prevents either supply or demand from forming.33 Technologies that improve the mechanics of NSMD systems, such as making tracking more reliable, could potentially change evaluations of firms, stakeholders, and customers about whether and when to support NSMD certification systems, as well as better delineating and solidifying their global “political communities.” 3. Analytical Framework Given the complex ways technology can both exacerbate global environmental and social challenges and also nurture private regulation in general and NSMD certification systems in particular, what analytical distinctions are useful to inductively assess the relationships between technological innovations and private regulation? We identify three questions any comparative effort would need to assess. First, analysts must ask what environmental and social challenges confront a given sector. Without an answer to this question it is impossible to know whether private regulation, in general, and a technological innovation, in particular, can ever address the problems of concern to the suppliers of private regulation. Attention to this question must therefore address the negative effects that technology has had in expanding global supply chains and creating incentives for the high extraction rates or other negative social and environmental practices that NSMD certification systems are attempting to reduce. Second, it is critical to ask what forms of private regulation operate in a given sector. Analysts must identify the range of initiatives, taking care to identify how closely they fit the key features of NSMD certification systems noted above, and particularly whether regulations require behavioral changes to address social and environmental externalities, the policy content of the actual requirements, and whether formal assurances of compliance are required. Third, it is necessary to ask whether and how technological innovations may improve the mechanics of private regulation and/or help to promote adherence to one or more of a program’s performance standards. The former must include attention to the technologies that improve tracking of products, and also be open to other less obvious, but equally important impacts, such as the role of technology in rendering transparent any efforts to model future impacts, which may build trust in the claims made by the suppliers of private regulation. The 33
We are indebted to Tim Büthe for this insight about the sequencing problem as separate from the cost-benefit problem.
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latter requires assessing technologies that either reduce the costs of complying with on-the-ground performance requirements or open up new possibilities for less intrusive behaviors. This requires attention to technologies that improve workers’ health and safety or reduce “collateral” damage associated with particular practices. Likewise, analysts should take care to distinguish the social impact of technology, such as effects on equity or empowerment, workers’ health, and safety concerns, from the impact of technology on a firm’s environmental footprint. To be sure, some technologies will have simultaneous impacts on one or more of these concerns. For instance, the role of a cell phone or personal digital assistant (PDA) in communicating real-time commodity prices may enhance the bargaining power of producers previously hampered by information asymmetries while also facilitating better tracking of environmental behaviors.34 4. Application of the Analytical Framework We apply the framework by first focusing on the problems confronting economic activities in the individual case study sectors and then reviewing the types of NSMD certification systems that have emerged to address these problems. We then turn to assessing the role of technology in improving both the mechanics of NSMD systems and compliance with their performance standards. To generate cross-sectoral comparisons, we do not present the five cases individually, but instead integrate the cases within an overall assessment of the three questions identified in our analytical framework. 4.1 The Problems Confronting the Case Study Sectors The environmental and social challenges in the case study sectors, which involve the extraction and/or management of natural resources, are extensive, as established by a wealth of scientific evidence. Research underscores the widespread and alarming pace of global forest deterioration through the shifts in ecosystem structure and function and biodiversity loss, much of which is fueled by poor forestry practices and deforestation—resulting in what some refer to as the sixth major mass extinction in the Earth’s history.35 In Africa and Latin America alone one hundred million hectares of tropical forests were lost between 1990 and 2000.36 Conservation biologists studying protected areas have found
34
Daviron and Ponte 2005. Leakey and Lewin 1995; Pimm and Brooks 2000. 36 UNEP 2002. 35
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that the existing efforts to preserve twelve percent of the world’s forests from industrial extraction will not be sufficient to check the decline in biodiversity.37 Turning to the oceans, global fisheries declines are arguably one of the greatest challenges of our time. The Food and Agricultural Organization of the United Nations estimates that, of the stocks with sufficient assessment data, seventy-five percent are “fully exploited or overexploited (or depleted and recovering from depletion).”38 The direct causes include increased consumption, and, ironically, fish farming which reduces human consumption pressure on wild stocks but also creates an array of risks to ocean fisheries. These include increased disease and pathogen infections for wild stocks and demands on previously noncommercial species for aquaculture feed.39 Fishing for a target species frequently ensnares significant quantities of non-target species, a phenomenon known as “bycatch.”40 Habitats destroyed or degraded by bottom trawling and dredging further exacerbate the ecosystem-wide effects of heavy fishing efforts. The live-reef-fish trade is a smaller scale example of the challenges facing marine ecosystems. Beginning in the 1950s the ornamental fish industry, which supplies home aquariums, has grown into a profitable market for small fishing villages in Southeast Asia.41 Negative impacts include depletion of fish species and degradation of coral reefs particularly when cyanide and dynamite are used to stun fish and break apart the coral. Although these techniques make harvesting easier, they also degrade the coral thereby reducing its quality as habitat, and weaken the fish, leaving them less hardy for transportation to markets.42 Coffee production also creates a number of environmental and social challenges. Social impacts include social-justice issues associated with global supply chains that tend to reinforce and reproduce a system where wealthy consumers benefit from, and contribute to, community impoverishment in developing countries. This, in turn, undermines health and education services, further limiting development options. Similar concerns arise with labor practices in the cultivation, processing and transport of coffee. Environmental challenges include deforestation through clearing for coffee, and land degradation and water pollution associated with the use of chemicals and fertilizers and dumping of organic waste.43 37
Sinclair et al 1995. Food and Agricultural Organization 2007. 39 Naylor and Burke 2005; Naylor et al 2000. 40 Chuenpagdee et al 2003. 41 Baquero 1999; Barber and Pratt 1997; Rubec et al 2001; Shuman, Hodgson, and Ambrose 2004. 42 In the case of cyanide, fishers dive the reef, searching for marketable reef fish. The fishers then squirt the poison in the water to stun fish so that they can be easily caught in nets. If needed, the fishers further degrade the reef by breaking apart coral to reach hiding fish. Cervino et al 2003; Rubec et al 2001. 43 Rice and McLean 1999; Luttinger and Dicum 2006. 38
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Our final two cases, electronic waste (e-waste) and climate change, have similar degrading effects on ecosystems but create pollution externalities, either as emissions from manufacturing, transport and power generation or as waste. Ewaste, such as post-consumer computers and mobile phones, is estimated to be the fastest growing component of our waste stream44 owing to the enormous amount of electronic equipment that is sold each year,45 only a tiny fraction of which is recycled.46 International environmental groups purport that large amounts of these products are not recycled domestically but are sent to countries of the global South, such as China, India, Nigeria, and Ghana.47 While some of these electronic devices are refurbished for reuse, a large amount cannot be reused and are instead striped of valuable materials in ways that harm human health and create local toxic waste problems. Even when recycled in advanced countries, workers’ health and safety issues, as well as pollution issues resulting from incineration or disposal in landfills, are important concerns. Finally, the release of greenhouse gases is, by almost all accounts, the most pressing challenge facing the planet. Arguably no problem has received greater scientific and scholarly attention in recent years. This is an immense problem owing to both its potential impacts, with scientists forecasting that we risk “mass extinctions” if average temperatures rise by more than 1.5-2.5 degrees Celsius.48 Many political processes have led to various agreements to limit warming to 2° C above pre-industrial levels, with some scientists calling for limiting warming to 1.5° C.49 Temperature has already risen 0.8° C in the last century (roughly 0.6° C thereof in the last three decades), and we are committed to an additional 0.6° C because of thermal inertia.50 Limiting atmospheric concentrations of greenhouse gases to 450 ppm—which still implies a probability of twenty-six to seventy-eight percent of overshooting the 2° C goal51—would require developed nations to reduce emissions by eighty to ninety-five percent compared to 1990 levels, with substantial deviation from business-as-usual 44
The U.S. Environmental Protection Agency (EPA) estimated that in 2005 2.63 million tons of ewaste was added to the municipal waste stream in the U.S. and another 3.01 million tons in 2007. 45 In 2007, 269 million, and in 2008, 295 million computers (desktops and laptops) were sold worldwide. IDC 2008, 2009a. This is based on the number of total shipments, i.e. manufacturers’ sales to stores. For mobile phone sales, the numbers are a staggering 1.14 billion units in 2007 and another 1.18 billion in 2008. IDC 2009b. 46 As of 2005 only 13.7 percent (360,310 tons) and in 2007 13.6 percent (409,360 tons) of this ewaste was recycled in the U.S. U.S. Environmental Protection Agency 2008: 71-72. 47 Basel Action Network 2005; Basel Action Network and Silicon Valley Toxics Coalition 2002; Greenpeace 2008; Toxics Link 2003. 48 IPCC 2007. 49 UNFCCC 2009. 50 Hansen et al 2008. 51 Meinshausen 2005. http://www.bepress.com/bap/vol12/iss3/art9 DOI: 10.2202/1469-3569.1323
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trajectories in all other regions, so that emissions would peak between 2000 and 2015.52 4.2 The NSMD Programs Formed to Address the Problems In response to the accelerating nature of the environmental challenges, and frustrations with the efforts of governments and intergovernmental negotiations to address them, unlikely coalitions of environmental groups, social activists and proactive business associations have emerged to create, and support, a range of NSMD certification systems (see Table 2). Within forestry, the FSC, one of the first globally oriented NSMD systems, was formed in 1993 following frustration with the limited impact of the intergovernmental International Tropical Timber Agreement;53 failed efforts to sign a global forest convention at the 1992 Rio Summit (UNCED);54 and tropical timber boycott campaigns led by the Rainforest Action Network, among others. The FSC coalesced and expanded a variety of eco-labeling/certification efforts including, the Rainforest Alliance’s SmartWood Program formed in 1989 to certify timber from well-managed forests, Friends of the Earth-UK’s “Good Wood” scheme formed in 1987,55 and initiatives such as Hubert Kwisthout’s Ecological Trading Company that incorporated to source sustainable timber directly.56 The FSC sparked a spate of producer-backed programs, many of which are now housed under the umbrella of the Program for the Endorsement of Forest Certification (PEFC). Within fisheries, separate programs exist for ocean-capture and aquaculture. The first certification programs focused on “organic” aquaculture aimed to promote practices limiting the negative effects of aquaculture on marine environments. The Soil Association first worked on salmon and trout farming in 1989, which led to an interim standard in 1998. During this same time Bio-GRO and Naturland developed their own organic standards. In 2000, the International Federation of Organic Agriculture Movements (IFOAM) prepared a draft for its own aquaculture standard, which was finalized in 2005.57 The Global Aquaculture
52
IPCC 2007. Gale 1998. 54 Humphreys 1996; Bernstein and Cashore 2004. 55 Bartley 2003. 56 Viana et al 1996, 144. 57 Tacon and Brister 2002. 53
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Business and Politics, Vol. 12 [2010], Iss. 3, Art. 9 Table 2, NSMD programs in the case study sectors Policy problem Market Regulatory target Tracking Global forest Forest products Forest companies and Yes degradation owners PEFC Sustainable forest Forest products Forest companies and Some management forest owners Electronics eElectronic waste Recycling and Electronic recyclers, Yes Recycling Stewards refurbishment of refurbishers, asset electronics managers, processors and refiners Fisheries MSC Fisheries depletion Seafood Ocean-capture Yes fisheries MAC Coral reef degradation Live-fish aquarium Live-fish fisheries Yes and live-fish quality trade GAA Impacts of poor Aquaculture including Fish farmers Yes aquaculture practices shrimp, tilapia and catfish Coffee/ IFOAM Impacts of industrial / Agricultural products, Farmers Yes Fisheries chemical intensive aquaculture, forests food production Coffee RA Impacts of Agricultural products Tropical farmers Yes agricultural on including bananas, cuttropical forest flowers, tea, cocoa, ecosystems and coffee Utz Food safety and poor Agricultural products Tropical farmers Yes agricultural practices including coffee, tea, cocoa FLO Poor terms of trade Agricultural products Developing-world Yes and social including tea, coffee, farmers development cocoa, cut-flowers, opportunities for bananas, etc… farmers in developing world 4C Poor agricultural Coffee Farmers Some practices SMBC Biodiversity loss and Coffee Coffee farmers, mainly Yes habitat degradation in Central America Climate VCS Climate impacts of Carbon offsets Entities (firms, Change activities producing organizations) that mitigation greenhouse gas produce greenhouse emissions gases; forest owners GS Climate impacts and Carbon offsets Entities (firms, sustainable organizations) that development produce greenhouse gases Revised version of Appendix A from Bernstein and Cashore 2007. Notes: FSC – Forest Stewardship Council; MSC – Marine Stewardship Council; FLO – Fairtrade Labelling Organizations International; GAA – Global Aquaculture Alliance; SMBC – Smithsonian Migratory Bird Center; 4C – Common Code for the Coffee Community; IFOAM – International Federation of Organic Agriculture Movements; MAC – Marine Aquarium Council; PEFC – Program for the Endorsement of Forest Certification; VCS – Voluntary Carbon Standard; GS – The Gold Standard Sector Forestry
Program FSC
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Alliance (GAA), established in 1997 to defend this sector from outside criticism, developed its own third party certification in 2002.58 Ocean-capture programs first emerged for single species, such as dolphinsafe tuna.59 Broader ocean-wide programs came later when, in 1996, the World Wide Fund for Nature (WWF) in partnership with Unilever created the Marine Stewardship Council (MSC).60 As in the case of forestry, other programs have emerged including Naturland’s, which focuses on small-scale fisheries to advance development objectives.61 Similar to the MSC, the WWF played a large role in establishing the Marine Aquarium Council (MAC), which certifies responsible ornamental fish trade. Discussions first began in 1997, with the formal launch occurring in 1998.62 MAC’s standard imposes careful handling and storage requirements because this sector’s product consists of live fish. With coffee, the first certification programs were also focused on promoting organic practices. Demeter and the Organic Crop Improvement Association developed some of the first standards and certified coffee farms back in the 1980s.63 Coordination under IFOAM advanced in 1995 with the release of its formal coffee standards.64 Though IFOAM has sought to integrate socialjustice and labor issues into organic standards, it remains focused on soil conservation and restricting synthetic inputs. Parallel to these efforts, fair trade organizations launched a number of national labeling initiatives that, as of 1997, have coalesced as the Fairtrade Labelling Organizations International (FLO). FLO certifies coffee cooperatives, emphasizing social-development issues but has more recently added environmental standards.65 By the 1990s international efforts sought to expand a focus on organics to include a wide range of programs promoting ecologically sensitive agricultural practices. The Rainforest Alliance worked with the Fundacion Interamericana de Investigacion Tropical (FIIT)—which was already developing shade grown standards—and other Latin American NGOs to develop certification for sustainable agriculture for tropical crops, including coffee.66 This standard now covers social and environmental issues, but is less prescriptive than Fair Trade or the Organic programs noted above.67 The Smithsonian Migratory Bird Center 58
Auld 2009. Körber 1998; Brown 2005. 60 Fowler and Heap 2000. 61 Organic Consumers Association 2007. 62 Bunting 2001. 63 Giovannucci and Koekoek 2003, 45. 64 Linton, Liou, and Shaw 2004. 65 Raynolds, Murray, and Heller 2007; Courville 2008. 66 Wille 2004; Taylor and Scharlin 2004. 67 Even though its rules are viewed as less onerous, they still do require behavioral changes for onthe-ground practices, making the program fit within the definition of NSMD systems. For a 59
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developed a parallel but more focused “bird friendly” initiative that aims to encourage the maintenance of tropical forests essential for bird habitat. Reflecting the general preference for NSMD systems in the 1990s, two new programs formed. First, Utz (formerly Utz Kapeh) emerged to certify coffee in the late 1990s, focusing more on food safety and less on shade than the Rainforest Alliance program.68 Second, the Common Code for the Coffee Community (4C), which began as a partnership of the German Coffee Association and the German Development Corporation69 and expanded to include farmers, industry, trade unions, and NGOs,70 was launched in 2006 to promote social and environmental aspects of coffee production, processing and marketing. On the pollution and waste issues, NSMD programs are more recent but are developing rapidly. The Basel Action Network (BAN), with the support from a number of electronics recyclers and asset management companies, has developed an e-waste recycling standard called the “e-Steward Standard for Responsible Recycling and Reuse of Electronic Equipment.” This certification program is open to electronics recyclers, refurbishers, asset managers, processors and refiners that manage e-waste in an environmentally friendly and socially just way.71 The goals of the e-Steward standard include ensuring safe handling of ewaste and its components, ensuring compliance with the Basel Convention’s rules for hazardous waste exports and preventing illegal trade, and tracking of the waste across the recycling chain. The standard is heavily based on ISO 14001, yet it adds specific e-waste recycling-relevant performance requirements, making it closer to the NSMD ideal type. The accredited, third party audited certification program was launched in April 2010.72 Other standards are emerging that follow a less prescriptive EMS model, including: the Institute of Scrap Recycling Industries’ (ISRI) “Recycling Industry Operating Standard” (RIOS), which integrates into a single program the relevant aspects of ISO 9001, ISO 14001 and OHSAS 18001;73 and the EPA-facilitated “Responsible Recycling” (R2) best management practices, which were negotiated in the context of a multistakeholder dialogue with manufacturers, recyclers, NGOs, trade associations,
comparison of the Rainforest Alliance program to Fairtrade and Organics see Raynolds, Murray, and Heller 2007; Courville 2008. 68 Utz Kapeh 2003; 2005. 69 Specialty Coffee Association of America 2005; Ponte 2004. 70 Luttinger and Dicum 2006, 204. 71 Basel Action Network 2009. Collectors, brokers and transportation companies are currently excluded from the program. 72 e-Stewards 2010. 73 RIOS is not an e-waste-specific standard, though, as it is geared towards the scrap recycling industry in general. Institute of Scrap Recycling Industries 2009. http://www.bepress.com/bap/vol12/iss3/art9 DOI: 10.2202/1469-3569.1323
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refurbishers and government representatives.74 We suspect that, as with the PEFC in the forestry case, the R2 program will evolve to contain more prescriptive performance requirements. An important facet of the R2 standard, which makes it distinct from e-Stewards, is that it permits exports of certain hazardous e-waste especially to developing countries.75 The current NSMD certification systems for climate issues comprise numerous organizations that verify and certify the credits associated with carbon offset projects. The standards differ in their specific rules and methodologies, including their stringency, inclusion of requirements regarding non-carbon issues such as biodiversity protection or sustainable development, and project eligibility. A staggeringly complicated set of seventeen standards currently operate. In an effort to combine these standards and to reduce confusion, the Climate Group, the International Emissions Trading Association, and the World Economic Forum created the Voluntary Carbon Standard (VCS) in 2007. Though not an early arrival to the offset market, the VCS achieved a leading position—in 2009 certifying thirty-five percent of the voluntary market—in part because it serves to standardize the market but also because it reduces organizational barriers by linking multiple credit registries.76 If VCS represents the baseline, then the Gold Standard certification, created and supported by non-profit organizations with leadership by WWF, SouthSouthNorth, and Helio International, aims to be the "quality benchmark" for offset projects. It will only certify renewable energy and end-use energy efficiency projects that actively promote sustainable development. 4.3 Improving the Regulatory Mechanics of NSMD Systems We distinguish in this section those technologies that hold promise for reducing the costs of tracking goods through supply chains from those that provide other means, such as greater transparency and/or knowledge generation, with which to provide assurances that the labeled product is achieving the objectives the customer is paying for. Both of these processes are important, as we noted above, for improving the efficient operation of the regulatory mechanics of NSMD certification systems. Specifically, we discuss tracking and auditing technologies, followed by technologies facilitating accounting, an issue particularly relevant for climate-mitigation programs. 74
The R2 standard is not operated by the EPA itself. ISRI has included the standard in its certification program and now offers RIOS/R2 certification. Contrary to the e-Stewards standard, the R2 standard is not a global standard, but limited to the U.S. See Renckens 2010. 75 The e-Stewards program follows a Basel Convention amendment that bans such exports, a provision that does not yet have support from the necessary number of parties to be adopted as a formal amendment. Important to note is that the U.S. has not ratified the Convention yet. 76 Hamilton et al 2010. Published by Berkeley Electronic Press, 2010
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Tracking and Auditing: A review of literature on the role of tracking and auditing technology reveals the important role of four related innovations: geographic information systems (GIS), global positioning systems (GPS), cellular phones or PDAs, and DNA and chemical testing.77 First, GIS and GPS technologies facilitate spatial mapping of production and trade activities as they are conducted over time. GIS maps (such as Google maps) provide an initial broad assessment of land-use for the regulation of forest management, agricultural, or other practices, and a tool for the identification of ewaste recycling and disposal sites that would otherwise go undetected. For example, such GIS technology can help auditors assess whether firms are operating in protected areas and other areas of concern. GPS devices, on the other hand, allow for tracking of individual pieces of machinery or products, offering a low cost way to track, with a computer chip, pretty much anything. This has great potential for tracking products along supply chains but can also be used to monitor the movement of machinery within forest cut-blocks or fishing vessels out at sea. Second, cellular phones and PDAs greatly improve the efficiency of collecting and disseminating information.78 They can reduce the cost of uploading information and allow this information to be immediately available across a wireless network. For our purposes what is important is that these devices can interact with advancements in GPS and GIS technologies to provide virtually immediate tracking. That is, without a cell phone or PDA, GPS data must be uploaded manually whenever the operator or auditor is physically at the central server. However, these mobile devices make data transfer immediate—reducing uploading problems—and greatly facilitate “real time” tracking, which is often critical for stopping mistakes and/or providing immediate information facilitating the efficient flow of products along supply chains. Finally, technologies such as DNA testing and chemical analysis can pin point a product’s species, the geographic provenance of a product, and/or whether the product has been produced using an environmentally damaging practice. In this respect, these technologies correct information asymmetries in the market, offering clear and credible assurances about the qualities of the product.79 The technologies discussed above have been developed quite recently and their use in NSMD systems has barely begun. Yet there are already a few notable examples of such uses, which illustrate how these tracking technologies have 77
Bird and Thiel 2007; Chandra 2005; Degen 2007, 2008; Fuller 2006; Gautam 2006a; 2006b; Hagendijk and Irwin 2006; Hague and Loader 1999; Nielsen and Kjaer 2008; Pickles 1997; Resosudarmo and Subiman 2006; Ridder 2007; Bartley 2010. 78 Ironically, the rapid development of this technology has also led to the “dumping” challenges that e-waste certification is now attempting to ameliorate. 79 Akerlof 1970. http://www.bepress.com/bap/vol12/iss3/art9 DOI: 10.2202/1469-3569.1323
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worked alone or in concert to facilitate the mechanics of NSMD certification systems in our case studies. The first example comes from the ornamental fish trade. The U.S. Agency for International Development and the Academy for Educational Development initiated a pilot project termed “Tracking Nemo,”80 which promotes “an integrated, real-time, web-based information technology (IT) system to enhance identity preservation and traceability capacity within the Philippines’ marine aquarium trade.”81 The project relays real-time data to help coordinate the supply and demand sides of the market with the aim of: directing fishers to collect only the fish needed; avoiding over-harvesting; improving income distribution by tracking shipment results and payment details; and tracking the sustainable product throughout the chain of custody to facilitate certification efforts. It also sought to reduce the burden of certification’s paperwork requirements by giving the local fish traders PDAs that would wirelessly link into the buyer’s order, a photo database of marine ornamental species, and a receipt form.82 In a country that averages six daily mobile-phonebased text messages per capita,83 this PDA technology builds on a cultural norm of using mobile devices—a norm that cuts across professions and includes more socioeconomic strata than reading manuals or filling out paper forms would. It also reduces the literacy requirement of reporting, since forms can be photobased. While further refinements are needed for the technology to be operational throughout the trade, this project provides a useful illustration of how improving tracking mechanics can also concurrently improve the sustainability of the trade and the resource, as we discuss further below. Second, DNA testing and chemical tests, such as stable isotope analysis, have great potential to improve tracking of natural resource commodities and agricultural crops. Research is currently advancing methods for using DNA tests to determine the geographic origin of a tree species. If, as expected, the cost of conducting such tests is reduced over time, this innovation could provide a transformative breakthrough for tracking a number of seafood, timber and agricultural products through global supply chains. It could, at its highest potency, eliminate the cumbersome process of physically tracking products, allowing instead verification of origins once a product reached its final market. More modestly, it could act as a “quality assurance” to assess, and distinguish, tracking of certified products from “fake certificates” common in Indonesia and China.84 80
Personal interview, Marine Aquarium Council employee, March 9, 2006, Manila, Philippines. Marine Aquarium Council 2006. 82 Marine Aquarium Council 2006. 83 Gordon 2005. 84 Such false claims are rampant in developed countries as well. One study using DNA technology found that eighty percent of restaurants in New York State were making false claims that their salmon was “wild” when in fact, they were farmed. Brown 2009; Nielsen and Kjaer 2008; Technologia 2009; Azevedo 2008; Helveta 2009. 81
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Although DNA testing is expensive, especially when attempting to identify an individual species of narrow place of origin rather than a general region, academic and commercial research is progressively reducing these costs.85 While some remain skeptical of just what this technology can achieve, DNA testing has already been used to expose restaurants that falsely label seafood, giving a lesser species the name of a higher valued one so as to increase sales or justify higher prices and profits. The MSC now also reports that it uses DNA tests to spot check labeled products to confirm their species and origins, an added layer of oversight to bolster its credibility.86 Chemical analysis has also been useful in the ornamental fish trade, where a number of laboratories in the Philippines can check samples of live fish for cyanide residues. This test is meant to determine whether or not the fish was caught using cyanide, and its deployment may therefore serve as a deterrent for fishers thinking of using this substance. However, the test requires killing the fish, its accuracy has been questioned on scientific grounds, and it remains costly, indicating that it may have only limited potential.87 Still, it illustrates how ex post tests on products can be used to offer assurances of the claims made by NSMD certification systems. Finally, although DNA tests are not applicable to e-waste, there are interesting tracking efforts emerging that draw on the other technologies discussed above. GIS technologies have helped identify sites in developing countries where illegal e-waste activities are occurring and GPS receivers can be used to track the movements of disposed electronic devices or containers of these waste streams, as has already been done by NGOs such as Greenpeace to bring illegal trade to the public’s attention.88 The Indian government has also begun using GPS to track containers of e-waste domestically to ensure they are properly disposed.89 On a more pessimistic note, since discarded electronics are not necessarily traded in one piece, affixing the needed tracking chip may prove more difficult and certainly more costly. This situation may quickly change, however, as recent research has used the quantity of tin and lead in jewelry exported from China to assess whether the source materials for these products are likely recycled metals from electronic devices, finding evidence that this is likely the case.90 On balance current uses and applications seem to indicate that some of these tracking technologies hold less potential for reducing the costs of tracking for e-waste than possible for fisheries, forestry, agricultural and the aquarium trade. 85
Personal interview, official, Double Helix Tracking Technologies, Singapore, July 24, 2010. Marine Stewardship Council 2009, 2010. 87 Balboa 2009. 88 Briggs 2010. 89 Daily News and Analysis 2010. 90 Weidenhamer and Clement 2007. 86
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Accounting: With some sectors, NSMD certification systems need to track gases, such as greenhouse gas emissions. Instead of tracking specific units, therefore, these programs focus on accounting for net gains and losses in an overall budget, a regulatory problem distinct from the physical tracking described for the case of fisheries, forestry, agriculture and even e-waste. For this kind of regulatory accounting problem, other types of technological innovations have proven useful. For instance, internet-based registries help with the issuance, transfer, tracking, retirement, and reporting of offset credits. They also provide assurances that credits are not “double counted,” which happens when the same avoided emissions are granted credits using two different standards associations. The APX Registry, which supports the VCS, addresses this issue by checking the latitude and longitude of newly submitted projects against those of other projects. If the project is in close proximity to an already registered project, this information is provided to the verifying organization for further investigation. As markets for environmental services grow, whether in the regulatory or non-state realms, technological infrastructure to support the transactions will become even more important to assure environmental effectiveness. Devising acceptable methodologies for certifying carbon offset credits from the forestry sector has proven difficult. Particular issues for forestry projects relate to greater risk for leakage (displaced land-use activities shifting to an area outside the project boundaries), as well as concerns about permanence (the trees could die or catch fire, emitting the stored carbon) and additionality (ensuring the offsets go beyond reductions that would happen under business-as-usual). A technological innovation that has emerged in the voluntary market—applied by a number of the standards—is the use of carbon modeling. The purpose of the modeling is to accurately depict the dynamics of land-use change in the area and the effect of the offset project on those dynamics. In this way, the model can quantify the expected leakage, and discount the carbon credits accordingly. This can help to assuage buyers concerned about the accuracy and credibility of forestry offset credits. 4.4 Improving Compliance with NSMD Performance Standards A wider range of technological innovations have potential to make it easier to meet performance standards. Some technologies, such as devices that have been developed to exclude turtles from shrimp trawling nets and high floatation tires that reduce soil compaction in the context of tree harvesting, make it possible to conduct commercial operations while minimizing externalities. Other technologies facilitate new production processes and/or lead to the development of products that reduce emissions or waste. Technologies can also be used to
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remove toxins once emitted, or to reduce human exposure. To date however, their implementation appears to result in additional, not reduced, costs to firms. Still, in a number of cases, we find evidence that the fit between the requirements of a certification program and local context matters for how likely it is that methods will be found for reducing compliance costs. Technological innovations may serve as intervening variables, allowing an easier reconciliation between the two sets of expectations—those of the local community and those of the certification institution. We found the strongest illustration of this relationship in the ornamental fish trade. The ornamental fish industry is unique compared to most other NSMD certification systems in that the product subject to private regulations must be caught and delivered to the consumer alive.91 Yet the diffuse nature of the product’s supply chain meant that in the absence of certification, the benefits of maintaining a healthy catch were not well matched with benefits for those handling the fish. Hence, fishers would employ destructive capture methods whose negative impacts on the fish would not be apparent until after they were sold to purchasers in the next step in the chain of custody. In addition to harming the fish, the destructive capture methods also harmed the marine environment in which the fish lived. As a result, the “Tracking Nemo” project utilized PDAs to ameliorate both these issues by better matching supply with demand. Best management practices were also introduced to improve performance. Training began in the 1980s, introducing net-barrier methods and low-cost handling techniques such as perforated buckets or cages immersed in the water, which reduced mortality rates and enhanced product quality.92 With lower mortality rates, fishers could catch less fish and have the same amount arrive to fulfill orders alive. Still, even these techniques can be expensive for poor fishing communities and, with currently limited attention to customer demand, often do not enhance profitability.93 5. Discussion: Emerging Themes in Technology’s Role in Private Regulation In assessing the potential of technology both for improving the efficiency of tracking, and for easing—or increasing the level of—compliance with on-theground performance requirements of NSMD certification systems, our analysis revealed two additional insights that were “beyond our model” but important for understanding how technological innovations influence private regulation.94 First, 91
Auld et al 2009. Rubec et al 2001. 93 With the training, costs were reduced through the use of donated barrier nets. 94 Büthe 2002. 92
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technologies shape how problems are understood and whether coalitions can form in support of problem-oriented private regulatory institutions. Second, the ability of NSMD systems to foster learning means these programs can serve as incubators for technologies that may in turn improve the operation of government regulations. 5.1 Technology Shaping Problem Definitions and Winning Coalitions Problem Definition: Technological innovations shape how we think about global problems, either by influencing what solutions appear feasible and possible, or by uncovering previously misunderstood or neglected facets of ecological and social systems, such as the novel-for-the-time measurements that revealed thinning of the ozone layer over the North and South poles. In the forest sector, for instance, the emergence and application of technology that improves traceability has coincided with efforts to promote timber legality verification. While important, timber legality has much more modest goals than the objective of sustainable and environmental forest management associated with the FSC. This may be in part owing to what timber tracking technology can and cannot accomplish: it can identify the origin of wood, but it cannot determine how it was harvested. If technology shapes the art of “what is possible” to be certified using NSMD mechanisms, then it is important to reflect on what this means for how problems are defined. Such questions, to be sure, are not easy. For instance, it may be, as Cashore et al have theorized,95 that more modest goals for NSMD systems in the short term may help nurture and develop supply chain tracking systems, which would then permit more stringent standards or more ambitious environmental or social objectives at a later time—an insight which we turn to below in discussing the formation of winning coalitions supportive of private regulations. Technologies also appear to shape our understanding of problems through the way they influence the organization of, and production within, global supply chains. This goes beyond their role in creating problems, as we discussed at the outset, and instead underscores that technology shapes the feasibility of different policy solutions, which indirectly can influence the ways problems are understood and defined. For instance, technology is important for understanding the current state of the coffee industry, which has permitted small coffee-growing communities to play a role despite the prevalence of major industrial corporations. Though coffee traders and coffee roasters are highly concentrated, with a small number of firms controlling a large proportion of the world market,96 two factors work to ensure that a requirement for capital does not pose an insurmountable 95 96
Cashore et al 2007. Ponte 2004; Gresser and Tickell 2002; Daviron and Ponte 2005.
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barrier to entry. First, coffee stored in the right conditions can be kept in its green form for long periods of time without seriously degrading, particularly in comparison to perishable crops.97 Second, the cost of a small commercial roasting machine is minimal relative to capital needed in many other industries (for instance, the paper industry) and there are fewer economies of scale in roasting.98 Taken together, these two characteristics of the coffee industry mean it may be hard for the larger roasters and traders in the industry to prevent entry by socially minded companies and organizations that seek to offer an alternative vision for how trade should occur.99 This effect does not, however, apply across all agricultural crops and hence illustrates how the feasibility of solutions—in this case setting up trade channels separate from those controlled by major companies—influences whether or not engagement with major firms is considered a problem or an acceptable part of the solution. Indeed, in other sectors, such as bananas, Shreck explains that highly perishable crops requiring sometimes capital-intensive care throughout their production, transport, and distribution will pose challenges for those aiming to set up a parallel trading system. This characteristic of the banana industry forces engagement with major firms.100 Winning Coalitions: The same technological innovations that direct problem definitions towards a narrower focus on issues such as legality verification in the short term may nevertheless foster the emergence of winning coalitions favoring enforcement of environmental and social standards in the future.101 This pattern is most evident in the forest sector.102 Because illegal timber deflates global timber market prices, by up to fifteen percent according to some estimates, a focus on verifying timber tracking, if relatively straightforward, would draw strategic support from legal forest operators, environmental groups and governments. All of these stakeholders would see their material interests advanced by such efforts: Industry would receive higher prices; government would gain increased timber revenue from legal operations; and environmental groups would eliminate a contributing factor to deforestation and forest degradation. Legality verification differs from the verification of broader sustainable forest management standards because it is easier to “weed out” the worst products from markets than reward the top products (and through them the desirable behavior), since excluding the worst need not rely on consumers' 97
Luttinger and Dicum 2006. Stored green coffee should be kept under eleven percent w/w (weight to weight) meaning eleven grams of water per one hundred grams of coffee bean. Mabbett 2007. 98 Durevall 2007. 99 Auld 2009. 100 Shreck 2005. See also Murray and Raynolds 2000. 101 Vogel 1997. 102 Cashore et al 2007. http://www.bepress.com/bap/vol12/iss3/art9 DOI: 10.2202/1469-3569.1323
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willingness to demand ethical or environmental products. For example, demand for legally verified forest products has come from the U.S. government, through amendments to the Lacey Act, which now requires that firms show “due care” in ensuring they do not purchase or sell illegal products. The EU Parliament recently passed similar legislation, under which due care can be met by directly importing from tropical and other countries who sign “voluntary partnership agreements” (VPAs) with the EU. Otherwise importers must turn to some type of assurance, such as private legality verification, to demonstrate compliance. In these cases, government legislation creates the demand for private regulation because importers fear breaking the law—a much more durable and effective incentive than relying on customer’s moral concerns over degradation.103 What is important for our review, and yet understudied in the literature, is the clear role of technological breakthroughs in fostering attention toward legality and the subsequent unleashing of a global coalition it has created. Although the links are not as well articulated in the context of fisheries or e-waste certification, the possibilities are there for a similar dynamic to emerge. Indeed, the Lacey Act has been used to fight illegal fishing activities since a 1981 amendment, offering nearly 20 years of experiences before the Act was extended to forestry.104 As expected, the issue of illegal, unreported and unregulated (IUU) fishing has spurred some industry players to help facilitate regulatory action. Erceg discusses two groups, the International Southern Ocean Longline Fisheries Information Clearing House and the Coalition of Legal Toothfish Operators, both of which have produced reports seeking to fetter out IUU operators.105 Similar patterns might also occur with e-waste. Most of the recycling in developing countries is done in the informal sector, in individually or small family-owned informal businesses.106 All types of hazardous processes are used in these situations, with severe human health and environmental risks involved.107 Modern tracking systems such as bar code or GPS tracking, as well as innovations in worker health and safety equipment, could boost support from formal recycling businesses in those countries for increased public or private regulation. These formal recyclers, which are slowly emerging, are competing on price with the informal businesses that do not comply with legal requirements or private standards on legality verification, or environmentally and socially sound recycling behavior. The potential of technology to improve efforts to weed out illegal 103
As Cafaggi and Janczuk (2010) show, this is a common practice in the EU. Erceg 2006; Meyer 2008. 105 Erceg 2006. 106 Even Interpol is looking into the issue now to uncover organized crime networks involved in the illegal e-waste trade. INTERPOL 2009. 107 Agarwal and Wankhade 2006; Basel Action Network and Silicon Valley Toxics Coalition 2002; Toxics Link 2003. 104
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activities and to improve social conditions may therefore foster, and reinforce, politically powerful “Bootlegger and Baptist” coalitions in favor of expanding, not reducing, attention to global problems. 5.2 NSMD Certification Systems as Incubator for Technological Innovations The climate case illustrates how NSMD systems may create arenas for innovations that will also facilitate government regulation. This means that, notwithstanding Meyer and Gereffi's warning about the limits of private regulation as a substitute for government regulations,108 private authority may play a role as technology incubator, potentially facilitating and fostering, rather than bypassing, traditional public policy efforts at the domestic or global levels.109 Operation of the climate NSMD certification system involves investment by participants, leading to positive feedback effects, and the potential for greater contributions to problem amelioration. Offset project developers design projects to comply with individual standards, creating specific investments that give them an interest in the maintenance of a carbon market. Further, the market functions as a “testing ground for procedures, methodologies and technologies.”110 This appears to produce two kinds of learning effects. First, potential buyers of carbon credits and the public more generally can learn and gain confidence in how carbon markets function by participating in the evolution of this voluntary form. In countries without climate change legislation, like the United States, positive learning effects achieved through the NSMD certification system could reduce barriers to support for policy change. Second, producers of the carbon offsets achieve efficiency gains through experience in how to generate the credits (i.e., the application of the technology). Transferred into the context of regulated entities, the dividends from these advances could significantly multiply. For example, one standards association advertises: “Voluntary offset projects can deliver economic efficiency (best use of investment) and environmental benefits (lower emitting technologies are developed and implemented)... Abatements found in the voluntary market can then serve to assist in technology developments in the compliance market.”111 Why might greater innovation be occurring within the voluntary offset market than within compliance markets? Generally, it appears that the voluntary market has a more flexible organizational structure and involves lower costs compared to compliance markets, particularly the project-based Clean 108
Meyer and Gereffi 2010. For an effort to assess the symbiotic role of public and private authority; see Levin, Cashore and Koppell 2009. 110 Kollmuss, Zink, and Polycarp 2008. 111 TZ1 2008 (emphasis added). 109
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Development Mechanism (CDM) under the United Nation’s Kyoto Protocol. In fact, “procedural inefficiencies and regulatory bottlenecks” have led to delays in the approval of CDM projects, which in turn has “dampen[ed] enthusiasm for further innovation.”112 If indeed the voluntary carbon market has an influence on the direction of the regulatory markets, then these choices of winners and losers among technologies and project types could be magnified in the larger market over time. 6. Conclusions: Reflections and Future Research The role of technology in facilitating and fostering economic globalization on a vast scale, encouraging consumption and widening our ecological footprint, is well documented, including in every one of the sectors under review. What are less studied, however, are the countervailing effects technology might have in nurturing efforts to reverse the negative effects of neoliberal globalization by embedding social and environmental norms within market transactions. Our paper has begun to fill this gap by addressing the role of technology in two very different ways: how it might better link “demanders” to “targets” through innovative tracking technology; and how it might allow “targets” to more efficiently improve their environmental performance. Several important conclusions arise from our inductive efforts. First, we have explored the individual and collective potential of technologies that enhance the spatial and real time mapping of human activities, such as GPS and GIS, and those that can determine product origins and production methods ex post, particularly DNA testing and various chemical analyses. In all the cases reviewed, there are intriguing examples of how these technological innovations are enhancing the potential of NSMD certification systems to track products along complex global supply chains and offer assurances to stakeholders and consumers about the methods used to produce goods. NSMD systems regulating natural resource and agricultural commodities appear, at this point, to have more technological advancements to draw on than e-waste, though such cross-sectoral conclusions require further analysis. Second, a focus on technology as both a possible cause of, and solution to, environmental problems, misses an important but less obvious impact: their role in helping foster new global communities oriented around ameliorating environmental and social problems. Our inductive effort allowed us to uncover this much more complex, less direct, but potentially crucial impact. While technologies can sometimes facilitate compliance with NSMD performance requirements, our analysis suggests that these gains are, alone, unlikely to 112
Capoor and Ambrosi 2008.
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overcome the environmental problems associated with economic globalization. Yet tracking technologies that unite NSMD global communities—as lines on a map do for states—direct us to pay careful attention to the structural features of different forms of private regulation, rather than simply focusing on their standards or initial ability to garner support. A focus on the technologies improving tracking reshapes calculations of why different actors might support or join such systems, casting a new perspective on the ultimate potential of private authority. Tracking technologies provide new opportunities to solidify and link global political communities, even while they better translate existing demands. And both of these immediate impacts could be most important as prerequisites for enabling larger scale transformations at a later time. Recognition of this potential requires much greater attention to the ways in which private regulations evolve, and how they interact with other forms of private and public governance, and may yield important strategic implications about the role of technology in nurturing these efforts. For instance, a focus on tracking to unite global communities may require avoiding, initially at least, wider prescriptive standards, as these may deter uptake on the part of targeted firms. Instead, it may be necessary to first advance modest standards so that initial coalitions of support can focus on building tracking mechanisms, rather than supporting dueling certification programs that serve to create confusion in the market place and limit the tracking project. In the forest sector, for example, this may mean that, if private authority is to be nurtured, strategists will need to focus on the important, but more limited question of legality verification because the coalition of supporters and firms likely to benefit would be broader but could only form if tracking is undertaken. This in turn forces us to recognize the important role that government can play in creating rules governing imports of forest products, which may then, in turn, create incentives for firms to support nongovernmental and transnational monitoring and certification of legal forest products as a way of meeting domestic legal requirements. To be sure, the interaction of modest standards with technological developments to support supply chain tracking would have to constitute the beginning, not the end of the evolution of NSMD certification systems, since modest standards would be unable to address environmental and social challenges that carry high costs. Could such effort create the prerequisites for such an evolution? It seems plausible. Once products are tracked along a supply chain and all legal producers are demanding tracked inputs, it will be much easier to increase standards in ways that reward, rather than punish, participants who minimize negative externalities. And here, technology may indeed provide the missing piece of the puzzle by providing both the means for, and reducing the cost of, what is required to track products in ways that provide credible assurances. Whether and how technology might work to link global communities
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to overcome the “chicken and egg” dilemma facing NSMD certifications systems will be highly dependent on the specific attributes of each sector. We cannot assume that what is possible and necessary in the forest sector will be the same for the ornamental fish trade or fair trade coffee—both of which are much more specialized and may, with adequate market demand, address the specific set of problems they target.113 Finally, while we have focused on the way in which NSMD certification systems can serve as incubators for innovation, it is important to recognize that this is a critical area where private regulation intersects with public authority. The state remains a crucial supporter of innovation, both through the provisions of intellectual property rights, but also via more direct and targeted investments in innovation. Hence, although we have stressed the way technology may positively shape the mechanics of and compliance with private regulation, future research should take care to consider how states feature in this process. Just as there is considerable discussion within inter-governmental processes on the need for technology transfer to developing countries, our review highlights the importance in understanding how such technological diffusion might occur between states and private regulation. What is clear is that technological innovations have important, and yet complex, impacts in shaping new identities, problem definitions and global coalitions, and in fostering new solutions. Our review has demonstrated the importance of continuing to study the precise nature of these relationships if we are to advance both the scholarship and practice of private regulation in the global economy. References Agarwal, Ravi and Kishore Wankhade. 2006. “Hi-Tech Heaps, Forsaken Lives. E-Waste in Delhi.” In Challenging the Chip: Labor Rights and Environmental Justice in the Global Electronics Industry, edited by Ted Smith, David A. Sonnenfeld and David Naguib Pellow. Philadelphia: Temple University Press, 234-246. Akerlof, George. A. 1970. “Market for Lemons: Quality, Uncertainty and Market Mechanism.” Quarterly Journal of Economics 84 (3): 488-500. Auld, Graeme. 2009. Reversal of Fortune: How Early Choices Can Alter the Logic of Market-Based Authority. Ph.D. Dissertation, Yale University, New Haven.
113
See Auld 2010, for analysis of sector-level interactions among programs in the coffee sector.
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Article 10
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Private-Public Interaction in Global Governance: The Case of Transnational Commercial Arbitration Christopher A. Whytock, University of California, Irvine
Recommended Citation: Whytock, Christopher A. (2010) "Private-Public Interaction in Global Governance: The Case of Transnational Commercial Arbitration," Business and Politics: Vol. 12 : Iss. 3, Article 10. Available at: http://www.bepress.com/bap/vol12/iss3/art10 DOI: 10.2202/1469-3569.1324 ©2010 Berkeley Electronic Press. All rights reserved.
Private-Public Interaction in Global Governance: The Case of Transnational Commercial Arbitration Christopher A. Whytock
Abstract Scholars of international relations and global governance are increasingly interested in the transnational commercial arbitration system. So far, they have tended to characterize the system as a form of private global governance. However, using a combination of empirical and legal analysis, this article draws attention to the critical role of the state in the transnational commercial arbitration system, and shows that both rule-making and enforcement in the system depend largely on interactions between private and public actors. By treating arbitration as a form of private governance, scholars run the risk of obscuring these interactions and hindering their understanding of how transnational economic activity is governed. This article therefore argues for a modest reorientation of global governance scholarship on transnational commercial arbitration in a direction that focuses more closely on private-public interaction. More broadly, this article suggests that understanding interactions between private and public actors is a key to understanding global governance in general, and it raises doubts about the analytical desirability of a sharp distinction between private and public forms of global governance. KEYWORDS: private governance, IPE, regulation Author Notes: Christopher Whytock is Acting Professor of Law, University of California, Irvine. He can be reached via email at:
[email protected]. For their very helpful comments, the author thanks Andrew Bell, Tim Büthe, Laurence Helfer, Dean Weedon, participants at workshops at the Duke University Center for International Studies and the University of Utah, Department of Political Science, and two anonymous reviewers.
Whytock: Private-Public Interaction in Global Governance
1. Introduction Scholars of global governance are increasingly interested in transnational commercial arbitration—the binding resolution of transnational commercial disputes by private third-party decision makers.1 The emerging interdisciplinary scholarship on the transnational commercial arbitration system has the potential to make important contributions to our understanding of global governance. The system offers dispute resolution services that are widely used by transnational actors, and it provides a process for the interpretation and enforcement of contracts, which are the backbone of transnational commerce. By understanding arbitration, scholars can better understand the governance of transnational commerce. The study of transnational commercial arbitration also can shed new light on the role of private actors in global governance, thus contributing to the continuing efforts of scholars of international relations to move beyond traditional state-focused analysis.2 Two questions have traditionally been at the core of social science scholarship on governance: Harold Lasswell’s “who gets what” question3 and Robert Dahl’s “who governs” question.4 Transnational commercial arbitration involves private third parties (arbitrators) answering the “who gets what” question in disputes between transnational commercial actors. It is therefore natural to think of transnational commercial arbitration as a system of global governance in which private actors are the “governors.”5 Various scholars have therefore characterized transnational commercial arbitration as a form of private global governance.6 In this article, I use a combination of empirical and legal analysis to draw attention to the critical role of the state in the transnational commercial arbitration system, and I show that both rule-making and enforcement in the system depend largely on interactions between private and public actors. Conceptually, arbitration does not fit neatly into established categories of “private” or “public” governance. By treating arbitration as a form of private governance, scholars run the risk of obscuring the role of the state and its interactions with private actors, 1
E.g. Cutler 1995, 2001, 2003; Gal-Or 2008; Mattli 2001; Stone Sweet 2002, 2006. E.g. Büthe 2004; Cutler et al 1999; Graz & Nölke 2008; Hall & Biersteker 2002. 3 Lasswell 1936; Caporaso et al 2008, 406. 4 Dahl 1961. 5 On the concept of “global governors,” see Avant et al (2010). 6 E.g. Gal-Or 2008, 219 (discussing arbitration as part of the “formal institutionalization of transnational private governance”); Mattli 2001, 919 (discussing transnational commercial arbitration as a “private international institutional arrangement”); Stone Sweet 2006, 628 (discussing transnational commercial arbitration as part of “a private system of governance for transnational business”); Whytock 2008a, 457 (describing transnational arbitration as part of “transnational private governance”). 2
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thus hindering their understanding of how transnational economic activity is governed. I therefore argue for a modest reorientation of global governance scholarship on the transnational commercial arbitration system, according to which scholars would conceptualize the system as a mixed private-public form of governance and place more emphasis on understanding private-public interaction in the system. A broader implication of the article’s analysis is that understanding private-public interaction is a key to understanding global governance in general.7 Part 2 provides an overview of transnational commercial arbitration as a system of global governance. Any system of governance must provide for the setting of rules and their enforcement.8 The remainder of the paper thus analyzes several different types of data to shed empirical light on who makes the rules in the transnational commercial arbitration system, and who enforces them. Part 3 shows how private and public actors together make not only the rules governing the overall system, but also the procedural and substantive rules governing particular arbitral proceedings. Next, Part 4 shows how both private and public actors help mitigate enforcement problems in the transnational commercial arbitration system. These problems include enforcement of agreements to arbitrate, as well as enforcement of arbitrators’ decisions. Throughout the article, I complement the empirical analysis with insights from legal scholarship that recognizes the system’s hybrid nature, scholarship which may be useful for scholars of global governance interested in transnational commercial arbitration.9 I conclude by drawing out some of the broader implications of the analysis. 2. Transnational Commercial Arbitration and Global Governance 2.1 An Overview of the Transnational Commercial Arbitration System Arbitration is a method of dispute resolution whereby two or more parties (“disputants”) submit their dispute to a third-party decision maker (the “arbitrator”). The party initiating arbitration is the “claimant,” and the other party is the “respondent.” Arbitration has four defining characteristics. First, the arbitrator is a private actor selected by the disputants themselves, or in accordance with a procedure agreed in advance by the disputants. Often, there are several arbitrators. Second, arbitration is consensual. An arbitrator cannot resolve a dispute unless the disputants have agreed to have the arbitrator resolve that 7
Similarly, Bartley argues that “scholars of private regulation should abandon the image of global standards bypassing the state and transcending old configurations of power and instead attend to the fascinating ways in which standards are filtered, renegotiated, or compromised as they enter particular political economies” (2010, 38). 8 Kjaer 2004, 10. 9 For an especially useful entry point to this legal scholarship, see Drahozal 2009. http://www.bepress.com/bap/vol12/iss3/art10 DOI: 10.2202/1469-3569.1324
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dispute.10 Third, in arbitration, the disputants are for the most part free to choose the procedural and substantive rules governing the dispute resolution process.11 Fourth, the arbitrator’s final decision—called an “award”—is binding on the disputants. When the claimant prevails, the award typically takes the form of an order that the respondent (now the “award debtor”) pay a certain sum of money to the claimant (now the “award creditor”). A comparison with two leading alternatives to arbitration—mediation and litigation—helps clarify these four characteristics. First, like arbitration, mediation and litigation involve third parties. Like an arbitrator, a mediator is a private actor. In contrast, the third party in litigation is a state actor (a judge). Second, like arbitration, mediation is consensual. Litigation, however, is nonconsensual: once one disputant (the plaintiff) initiates the litigation process, the other disputant (the defendant) may be bound by the judge’s decision even without its consent. Third, in contrast to arbitration and mediation processes, which are generally governed by rules agreed upon by the disputants, state law Fourth, whereas determines the rules governing litigation procedures.12 arbitrators’ and judges’ decisions are legally binding, mediators do not make binding decisions. Transnational commercial arbitration involves the arbitration of disputes arising out of commercial activity having connections to more than one state. These connections may be territorial, when the activity or its effects touch the territory of more than one state; or they may be based on legal relationships between a state and the actors engaged in or affected by that activity, such as citizenship.13 Investor-state arbitration—the arbitration of disputes between a state and a foreign investor in that state—is generally treated as a distinct form of transnational arbitration, and is not discussed in this article. There are two basic types of transnational commercial arbitration: “institutional” and “ad hoc.” In institutional arbitration, the disputants select an existing private arbitral institution to administer the arbitration process. Along 10
Under some circumstances, an arbitration agreement between two or more parties may also be binding on other parties based on legal theories such as agency and the “group of companies” doctrine. Blackaby and Partasides 2009, 99-105; Born 2009, 1142. In general, once arbitration has begun, a party does not have a right to stop the proceedings unilaterally. If a party fails to participate in the proceedings, it runs the risk of a default award being entered against it. Blackaby and Partasides 2009, 524. 11 This freedom is subject to mandatory provisions of law. See Born 2009, 1765. 12 I use the term “state” to refer a nation-state, not a territorial subunit thereof such as a “state” of the United States. 13 I use the adjective “transnational” instead of “international” because the latter technically refers only to states and their relations with each other, and does not include private actors. Nye & Keohane 1971, 330-332. Thus, by transnational activity, I mean activity engaged in by state and/or non-state actors having legal or territorial connections to more than one state. Published by Berkeley Electronic Press, 2010
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with that selection, the disputants often select the procedural rules developed by that institution. Among the leading transnational arbitral institutions are the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), and the International Centre for Dispute Resolution (ICDR) of the American Arbitration Association (AAA).14 In ad hoc arbitration, the parties do not select an arbitral institution to administer the arbitration process, and instead make their own administrative arrangements. As noted above, arbitration depends on the disputants’ consent. This consent can be given either before or after a dispute arises. Many transnational contracts include ex ante arbitration clauses. A typical example of such a clause is the one suggested by the ICC: “All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” Disputants may also agree after a dispute arises to submit that dispute to arbitration. However, once a dispute has arisen, litigation will often offer significant advantages to at least one of the disputants, making ex post agreements to arbitrate difficult to reach. For this reason, while transnational commercial arbitration is a common method for resolving disputes related to contractual relationships, it is likely to be relatively rare in disputes between parties who are not in preexisting contractual relationships.15 2.2 The Role of Arbitration in the Governance of Transnational Commerce The transnational commercial arbitration system performs several closely related functions in the governance of transnational commerce. First, by offering a mechanism for third-party interpretation and enforcement of contracts, it provides a means by which transnational actors can enhance the credibility of their commitments to each other.16 Second, by providing a process for filling gaps in contracts, arbitration can mitigate the incomplete contracting problems routinely faced by transnational commercial actors.17 Third, the transnational commercial arbitration system offers dispute resolution services that can help transnational actors manage the costs of conflict in commercial relationships.18
14
A list of all the acronyms used in this article can be found in the appendix. Born 2006, 37; Moses 2008, 17. 16 On the importance of third-party enforcement for credible commitments and, hence, for contracting, see North 1993. See also Stone Sweet 2002, 324-326. 17 Blackaby & Partasides 2009, 536f. 18 Ashenfelter 1998, 88. 15
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Alternatively, these functions may be performed by domestic courts.19 However, arbitration is widely understood to have a number of advantages over litigation as a method of transnational commercial dispute resolution. Arbitration may offer a more neutral alternative to litigation in a court of a disputant’s home country. Whereas state-made rules govern the litigation process, arbitration is a flexible process that the disputants themselves can tailor to their needs. While litigation ordinarily is public, the disputants can agree to keep arbitral proceedings confidential. Perhaps most importantly from the perspective of disputants, it is generally easier to enforce an arbitral award issued in one country against the assets of an award debtor in another country than it is to do so with a judgment of a court.20 But arbitration is not without its disadvantages. Although it was once considered a speedier and less expensive method of transnational commercial dispute resolution, this perception may be eroding.21 Moreover, there generally is no right to appeal an arbitrator’s decision. Another disadvantage is that arbitrators lack the coercive power of the state that courts can use to compel disputants and third parties to produce information relevant to the dispute. However, arbitrators may draw adverse inferences from a disputant’s refusal to make available relevant information, and in some countries (including the United States) judicial enforcement of arbitral orders to produce evidence is available.22 Finally, because of its consensual nature, arbitration ordinarily cannot be imposed on a person who is not a party to the arbitration agreement.23 2.3 The Empirical Importance of Transnational Commercial Arbitration Ex ante arbitration clauses are common in transnational commercial contracts. However, their frequency is difficult to estimate. One observer claims that more than ninety percent of all transnational commercial contracts contain an arbitration clause,24 while another argues that the actual frequency of arbitration clauses is substantially lower.25 According to a recent empirical analysis, only twenty percent of the transnational contracts of U.S. public companies filed with the United States Securities and Exchange Commission (SEC) contain arbitration 19
For a discussion of the role of domestic courts in global governance, see Whytock 2009. For a discussion of the factors influencing transnational actors’ selection of arbitration versus litigation from the perspective of rational institutional design theory, see Mattli 2001. 20 Born 2009, 78. 21 McIlwrath & Schroeder 2008. 22 Blackaby & Partasides 2009, 318f; Born 2009, 1919-1929. 23 Blackaby & Partasides 2009, 39, 99-106. 24 Berger 1999, 111. 25 Born 2009, 71. Published by Berkeley Electronic Press, 2010
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clauses.26 However, this analysis has been criticized as suffering from selection bias because contracts filed with the SEC may often be precisely the sorts of contracts for which arbitration is least appropriate.27 Even if the frequency of arbitration clauses is difficult to estimate, dispute resolution trends suggest that transnational commercial arbitration is increasingly widespread, as shown in Figure 1. The annual rate of filings with the world’s major international arbitral institutions has increased steadily from 1,148 in 1992 to more than 3,700 in 2008.28 Similar data is not available for ad hoc arbitration. While some observers speculate that ad hoc arbitrations are few compared to institutional arbitrations, others suggest that institutional and ad hoc arbitration rates are similar, and still others conjecture that ad hoc transnational arbitrations may in fact outnumber institutional transnational arbitrations.29 One benchmark for assessing transnational commercial arbitration trends in the leading arbitral institutions is to compare them to transnational contract litigation trends in the U.S. federal district courts. To estimate transnational contract litigation trends, I analyzed data collected by the Administrative Office of the United States Courts on civil lawsuits filed each year in the district courts.30 26
Eisenberg & Miller 2007, 350-352. Drahozal & Ware 2010, 460. 28 HKIAC 2009. The arbitral institutions included in this count are the AAA, the ICC, and the LCIA, as well as the China International Economic and Trade Arbitration Commission (CIETAC), Hong Kong International Arbitration Centre (HKIAC), the Japan Commercial Arbitration Association (JCAA), the Korean Commercial Arbitration Board (KCAB), the Kuala Lumpur Regional Centre for Arbitration (KLRCA), the Singapore International Arbitration Centre (SIAC), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), and the British Columbia International Commercial Arbitration Centre (BCICAC). Because the data collected by the Hong Kong International Arbitration Centre does not include ad hoc transnational commercial arbitration, and because data for some institutions include domestic as well as transnational arbitrations, these trends are an imperfect measure of overall transnational commercial arbitration rates. 29 Drahozal & Naimark 2005, 7. 30 The Administrative Office of the United States Courts (AO) data is part of the Federal Court Cases: Integrated Database Series, available from the Inter-University Consortium for Political and Social Science Research (http://www.icpsr.umich.edu/icpsrweb/ICPSR/series/00072). Specifically, I analyzed contract claims over which the subject matter jurisdiction of the U.S. federal courts is based on the fact that the dispute is between a citizen of a U.S. state and a citizen of a foreign country (i.e., alienage jurisdiction), as contained in the AO’s annual civil terminations data. To extract these cases from the data, I used the residence variable (which indicates the citizenship of the parties) and the nature of suit variable (which identifies the type of dispute being litigated, including contract disputes). I excluded two types of claims categorized by the AO as “contract claims”—Miller Act claims and stockholder suits—since they are unlikely to be subject to transnational arbitration, and their inclusion would thus risk biasing the comparison in favor of litigation. One disadvantage of the civil terminations data is that the record for a case (including its filing date) does not appear in that data until the case has terminated (that is, until proceedings have come to an end due to settlement, judgment, or otherwise). Cases filed in earlier years but 27
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Of course, transnational contract litigation in the U.S. federal district courts is just part of overall transnational commercial litigation worldwide. However, similar data is not available for transnational commercial litigation in U.S. state courts and courts in other countries.
Figure 1 Filings in U.S. Courts and Major Arbitral Institutions Using this benchmark, Figure 1 shows that, as transnational commercial arbitration filings in the world’s leading arbitral institutions have been increasing, transnational contract litigation filings in the U.S. federal district courts have been decreasing. In 1994, the total number of arbitration filings in the world’s leading arbitral institutions surpassed the number of transnational contract litigation filings in the U.S. federal district courts for the first time; and by 2006 the former which have not yet terminated will be missing from the data. Because lawsuits often last multiple years, this lag is likely to be particularly significant in the more recent years for which data is available. Therefore, to mitigate bias in favor of arbitration, I present results only through 2006. For more details on this data, see Whytock (2008b). However, because Whytock (2008b) analyzes terminations of claims while this article analyzes filings, the exact results differ. Published by Berkeley Electronic Press, 2010
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was substantially higher than the latter. As of 2006, the annual number of transnational commercial arbitration filings in each of the two most prominent arbitral institutions—the AAA and the ICC—was still individually lower than the annual number of transnational contract litigation filings in the U.S. federal district courts. However, if current trends continue, the AAA and the ICC each will soon be resolving more transnational commercial disputes than the U.S. federal district courts.31 In summary, transnational commercial arbitration is an increasingly widespread form of global governance. The upward trend in the number of disputes filed in the world’s leading arbitral institutions is particularly striking when compared to the downward trend in transnational contract disputes filed in the U.S. federal district courts. 3. Rule-Making in Transnational Commercial Arbitration The rules of the transnational commercial arbitration system include rules governing the system as such—for example, rules regarding the enforcement of arbitration agreements and arbitral awards—as well as procedural and substantive rules governing particular arbitral proceedings. Who makes these rules? Scholars have tended to treat the transnational commercial arbitration system as a private form of global governance. However, through a combination of international treaties and domestic law, states—working closely with private organizations— have played a fundamental role in making the rules governing the system. These rules provide critical, if qualified, support for transnational commercial arbitration. Private actors play a leading role in determining which rules govern particular arbitral proceedings—but here, too, the state plays an important role by supplying rules that private disputants frequently choose. Private-public interactions thus pervade both dimensions of rulemaking. 3.1 The Rules Governing the Transnational Commercial Arbitration System The most important transnational commercial arbitration treaty is the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention).32 Although made by states, the New York Convention is a product of private-public interaction. The ICC—a nongovernmental organization—produced the first draft, which the United 31
The extent to which these trends are causally related is unclear; see Whytock 2008b, 48f. This paper does not discuss two other important transnational commercial arbitration treaties: the Inter-American Convention on International Commercial Arbitration (known as the Panama Convention), and the European Convention on International Commercial Arbitration.
32
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Nations Economic and Social Council (ECOSOC) then revised; and the 45 state participants at the United Nations Conference on Commercial Arbitration finalized the convention in 1958.33 As one arbitration expert puts it, the convention “provides what amounts to a universal constitutional charter for the international arbitral process, whose sweeping terms have enabled both national courts and arbitral tribunals to develop durable, effective means for enforcing international arbitration agreements and arbitral awards.”34 As another puts it, the convention “is the foundation on which the whole of the edifice of international arbitration rests.”35 Article II of the New York Convention establishes a general rule that signatory states shall recognize written arbitration agreements “concerning a subject matter capable of settlement by arbitration.” It also requires the domestic courts of signatory states, at the request of a party to an arbitration agreement, to refer the parties to that agreement to arbitration “unless it finds that the said agreement is null and void, inoperative or incapable of being performed.” Article III establishes a general rule that signatory states shall recognize and enforce arbitral awards. Article V specifies a series of exceptions to this general rule, allowing refusal of enforcement “at the request of the party against whom it is invoked,” if that party proves to the competent authority where enforcement is sought that: (a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or (b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or (d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or (e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
33
Born 2009, 93f. Born 2009, 92f. 35 Kerr 1997, 127. See also Reisman 1992. 34
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Article V also allows refusal of enforcement “if the competent authority in the country where recognition and enforcement is sought finds that: (a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) The recognition or enforcement of the award would be contrary to the public policy of that country.” As one measure of the breadth of state support for these foundational rules of the transnational commercial arbitration system, I gathered data on the number of states that have become parties to the New York Convention over time.36 As Figure 2 shows, the number increased from nine in 1960, to fifty-five in 1980, to 124 in 2000. As of 2009, the New York Convention had entered into force in 144 of the 192 members of the United Nations. These results suggest broad and steadily increasing state support for the rules favoring enforcement of arbitration agreements and arbitral awards.
Figure 2 Cumulative Number of State Parties to New York Convention, by Year of Entry into Force 36
The source of my data is the table of signatories to the New York Convention maintained by the United Nations Commission on International Trade Law (UNCITRAL). See http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html (accessed December 15, 2009).
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In addition, individual states have enacted domestic laws providing for domestic judicial enforcement of arbitration agreements and arbitral awards. For example, in the United States, Section 206 of the Federal Arbitration Act (FAA) authorizes U.S. courts to order arbitration in accordance with an arbitration agreement covered by the New York Convention.37 Section 207 of the FAA requires U.S. courts to enforce an arbitral award covered by the New York Convention “unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” In addition to the FAA, the U.S. Supreme Court has announced a variety of important rules governing the enforcement of arbitration agreements and arbitral awards by U.S. courts, and is generally considered to have a strong pro-arbitration policy. Other states have also adopted domestic laws governing transnational commercial arbitration. For example, some states have adopted domestic legislation based on the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on International Commercial Arbitration, which, among other things, provides for enforcement of arbitration agreements and Although the Model Law was produced by an arbitral awards.38 intergovernmental entity—UNCITRAL—it was developed in consultation with private experts and arbitral institutions, and is thus, like the New York Convention, a result of private-public interaction.39 The UN General Assembly has encouraged states to consider the Model Law, but there is no requirement that states adopt it—it is only a model upon which states may base domestic legislation. Thus, its legal status depends on state legislative action. As another measure of the breadth of state support for the rules governing the transnational commercial arbitration system, I gathered data on the number of states that have enacted legislation based on the Model Law.40 As Figure 3
37
The full text of Section 206 is as follows: “A court having jurisdiction under this chapter may direct that arbitration be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States. Such court may also appoint arbitrators in accordance with the provisions of the agreement.” 38 Moses 2008, 64. Under Article 8(1) of the Model Act, “A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.” Article 35 states the general rule that arbitral awards shall be enforced, and Article 36 specifies exceptions to enforcement. The Model Law was amended in 2006. Article 34 specifies the circumstances in which a court may set aside an arbitral award. 39 United Nations Commission on International Trade Law 2006, vii. 40 The source of my data is UNCITRAL’s list of national legislation based on the Model Law. See http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html (accessed December 15, 2009). This count does not include nine U.S. states (California, Published by Berkeley Electronic Press, 2010
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shows, the number has increased steadily from one in 1986, to thirty-five in 2000, to a total of sixty-one as of 2008. This trend suggests increasingly widespread state support for the transnational commercial arbitration system.
Figure 3 Cumulative Number of States with Domestic Legislation Based on UNCITRAL Model Law, by Year In summary, the basic rules governing the transnational commercial arbitration system—including the rules governing the enforcement of arbitration agreements and arbitral awards—are a result of private-public interaction. States have demonstrated broad support for those rules through increasingly widespread adoption of international and domestic legal instruments such as the New York Convention and legislation based on the UNCITRAL Model Law.
Connecticut, Illinois, Louisiana, Oregon, and Texas), each of which have enacted legislation based on the Model Act. http://www.bepress.com/bap/vol12/iss3/art10 DOI: 10.2202/1469-3569.1324
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3.2 The Rules Governing Particular Arbitrations While states have enacted rules providing foundations for the transnational commercial arbitration system, private actors play the leading role in specifying the rules governing particular arbitral proceedings. These include both procedural rules, which specify how an arbitral proceeding should be conducted, and substantive rules, which are applied to the activity of the disputants that gave rise to the dispute. One of the defining features of transnational commercial arbitration is the ability of the disputants themselves to specify the applicable procedural rules, subject to any mandatory provisions of the law of the state in which the arbitration takes place.41 Procedural rules cover matters such as the number and selection of arbitrators, the place and language of the arbitral proceedings, the written submissions and oral arguments that the disputants are allowed to make, the presentation of evidence, and the testimony of witnesses. In theory, disputants can create their own procedural rules from scratch. In practice, however, they generally specify an existing set of procedural rules, adopting them either in their entirety or with modifications. The world’s leading private arbitral institutions have developed various sets of procedural rules. When disputants opt for institutional arbitration, they typically will also opt for the procedural rules of the administering institution. For example, for arbitrations administered by the AAA’s International Centre for Dispute Resolution (ICDR), the disputants will ordinarily select the ICDR’s own procedural rules.42 When the disputants select an arbitral institution’s procedural rules, those rules are private in a double sense: they were produced by a private institution rather than a state, and they are selected by agreement of the disputants rather than imposed by law. Even disputants who opt for ad hoc arbitration will not necessarily create their own procedural rules from scratch. They, too, will often select an existing set of rules, such as the UNCITRAL Arbitration Rules.43 UNCITRAL developed these rules in consultation with private arbitral institutions, and then formally adopted them. The United Nations General Assembly then passed a resolution recommending their use and widespread distribution.44 These rules are thus a product of private-public interaction—namely, between an intergovernmental organization (UNCITRAL) and various private arbitral institutions. 41
Blackaby & Partasides 2009, 180. In fact, the ICDR’s model arbitration clause includes selection of its International Arbitration Rules. See http://www.adr.org/si.asp?id=4945 (last accessed August 27, 2010). 43 These rules, adopted by UNCITRAL on April 28, 1976, are available at http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules/arb-rules.pdf (last accessed August 27, 2010). 44 United Nations General Assembly Resolution 31/98, December 15, 1976. 42
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Whereas procedural rules govern the arbitral process, substantive rules govern the activity of the disputants that gave rise to the dispute. The arbitrator is expected to determine whether the respondent’s behavior violated the applicable substantive rules and, if so, to issue an award in favor of the claimant.45 Disputants may specify the applicable substantive rules by including a choice-oflaw clause in their contracts. Disputants may specify private rules, including transnational commercial customs, which are sometimes referred to as “lex mercatoria” or “transnational law.” Or they may specify public rules, such as the national law of a particular state, or hybrid rules. Hybrid substantive rules include the UNIDROIT Principles of International Commercial Contracts. UNIDROIT—the International Institute for the Unification of Private Law—is an intergovernmental organization that aims to facilitate global harmonization of commercial law.46 To develop its Principles of International Commercial Contracts, UNIDROIT worked closely with private actors, including lawyers and legal scholars, with the goal of providing “a system of rules especially tailored to the needs of international commercial transactions.”47 Thus, like UNCITRAL’s procedural rules, the UNIDROIT Principles are a product of private-public interaction. The UNIDROIT Principles are not legally binding, and they have not been adopted as state law. However, disputants sometimes select them as a source of substantive rules. As one measure of the relative importance of public, private, and hybrid sources of substantive rules, Table 1 presents the rates at which disputants have selected national law rather than other sources in ICC arbitrations between 2003 and 2008.48 The data shows that national law is the most widely used source of substantive rules in ICC arbitrations. In approximately eighty percent of ICC arbitrations between 2003 and 2008, the parties specifically selected national law, and in only approximately one to three percent of ICC arbitrations did the parties select other sources.49 These figures suggest that the substantive rules applied in transnational commercial arbitration are usually drawn from public rather than private or hybrid sources. Similar data would have to be collected for non-ICC arbitrations in order to reach more certain conclusions.50
45
In practice, the award may be mixed, with some elements favoring the claimant, and others favoring the respondent. Thus, there will not necessarily be clear winners and losers. 46 See http://www.unidroit.org/dynasite.cfm?dsmid=84219 (last accessed August 27, 2010). 47 International Institute for the Unification of Private Law 1994, viii. 48 The source of my data is the annual statistical reports of the ICC contained in the ICC’s International Court of Arbitration Bulletin. See Drahozal 2009, 1039, Table 2 (compiling 20032007 data); ICC 2009, 12 (2008 data). 49 When the disputants fail to specify the applicable substantive law, the arbitrator ordinarily will do so. See Blackaby and Partasides 2009, 230f. 50 Drahozal 2009, 1039. http://www.bepress.com/bap/vol12/iss3/art10 DOI: 10.2202/1469-3569.1324
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Table 1 Source of Substantive Rules Selected by the Parties in ICC Arbitrations 2003 National Law Other Source No Selection
2004
2005
2006
2007
2008
80.4%
79.1%
79.3%
82.7%
79.3%
84.0%
1.2%
1.3%
1.7%
2.0%
0.5%
3.0%
18.3%
19.6%
19.0%
15.3%
20.2%
13.2%
Source: Annual Statistical Reports of the ICC, from International Court of Arbitration Bulletin, var. years.
Other studies also suggest that the use of private sources of substantive rules is relatively infrequent.51 It appears that a principal reason why transnational commercial actors avoid these sources is that they tend to consider them too vague to provide meaningful behavioral guidance.52 As one expert practitioner of transnational commercial arbitration explains: There is much academic debate, but little judicial authority, about what [non-national choice-of-law clauses] mean, and there are doubts [about] how widely they are enforceable . . . . Save where there is some powerful countervailing reason, business enterprises should not expose themselves to the uncertainties or expenses that participation in this scholastic debate could entail.53
51
E.g. Dasser 2008, 131 (finding a total of only 79 cases in which a non-national legal standard was applied in arbitration, 32 of which also involved application of a national law); Drahozal 2005, 540 (finding that 26.7%, or four of fifteen, international joint venture agreements publicly filed with the United States Securities and Exchange Commission between 1993 and 1996 contained arbitration clauses referring to either “international legal principles and practices” or “general international commercial practices”). Nevertheless, one study suggests that there is at least fairly widespread awareness of the use of private and hybrid sources of substantive law in transnational commercial arbitration. E.g. Berger et al 2001, 96, 104 (survey study of in-house counsels, attorneys, arbitrators and other persons working in the field of international business law finding that 42% of respondents, of which a disproportionate number were Swiss or German, were aware of the use of non-state law in transnational commercial arbitration). 52 Drahozal 2008, 671. 53 Born 2006, 124. Published by Berkeley Electronic Press, 2010
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Even if the rules applied in transnational commercial arbitration have primarily public sources, they are privately determined insofar as the disputants themselves (or, in some cases, the arbitrators) decide which rules will govern. Here, again, private-public interaction plays an important role in transnational commercial arbitration.54 In summary, states play a leading role in providing the foundations for the transnational commercial arbitration system. For their part, private actors play a leading role in determining the rules governing particular arbitral proceedings. In both areas of rule-making, there is substantial private-public interaction. 4. Enforcement in Transnational Commercial Arbitration The principal enforcement problems in transnational commercial arbitration involve ex ante arbitration clauses and arbitral awards. Parties often include an arbitration clause in their transnational contracts. Their decision to do so is a private choice, and may be based on a mutual belief that arbitration would be preferable to litigation in the event of a dispute. Alternatively, the arbitration clause may have resulted from bargaining: the parties may disagree about the desirability of arbitration, but the party opposing arbitration may accept the arbitration clause in exchange for concessions from the party preferring arbitration. In this sense, transnational actors’ “forum shopping” decisions are often a result of bargaining rather than simple rational choice. In either case, after a dispute arises or becomes likely, a party may conclude that it will be more likely to win (or likely to win more or lose less) in litigation than in arbitration. For example, a claimant may conclude ex post that it is more likely to win if it is able to present its case to a jury, or if it is able to add claims against additional parties that are not bound by the arbitration clause—all of which generally is possible in litigation but not arbitration. Such ex post assessments not only reduce the likelihood of ex post agreement to submit disputes to arbitration, but also increase the likelihood that a party will pursue litigation even if there is an ex ante arbitration clause. For example, the party may argue that the arbitration clause is invalid or does not cover the type of dispute that has arisen.55 Even if both parties follow their arbitration agreement and refrain from litigation, and the arbitrator issues an award in favor of the claimant and against the respondent, the respondent may fail to comply with the award. For example,
54
O’Hara and Ribstein (2009) usefully describe the interactions between states that supply legal rules and private actors that choose them as a “law market.” 55 Bermann 2003, 374. http://www.bepress.com/bap/vol12/iss3/art10 DOI: 10.2202/1469-3569.1324
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the arbitrator may issue an award requiring the respondent to make a monetary payment to the claimant, but the respondent may refuse to pay. A combination of private and public processes mitigates enforcement problems like these. For example, private enforcement of arbitration agreements and arbitral awards using reputational sanctions can enhance rule-following in transnational commercial arbitration.56 The logic is as follows: If an actor’s reputation for keeping its commitments is good, that reputation will increase the actor’s opportunities for entering profitable transactions with other actors who are aware of that reputation. If the reputation is bad, it will decrease those opportunities. Therefore, an actor’s reputation for keeping its commitments is a valuable asset. The actor has an incentive to keep its commitments—including agreements to arbitrate and abide by arbitral awards—because noncompliance will harm that reputation.57 Insofar as an actor desires to enter arbitration agreements in the future and avoid litigation, that actor will have a particularly strong incentive to foster a good reputation for complying with arbitration agreements and arbitral awards.58 However, reputational sanctions are likely to be effective only under certain conditions. For example, there must be a mechanism for disseminating information about parties’ behavior—information is, after all, the link between behavior and reputation.59 If A breaches an agreement to arbitrate with B, or refuses to comply with the resulting arbitral award, B obviously has knowledge of this, but absent a broader information-dissemination mechanism, other actors do not necessarily have this knowledge, potentially leaving A’s general reputation unharmed.60 One important value associated with arbitration, and often required by the disputants’ agreement—confidentiality—makes it particularly challenging to satisfy the information requirement with respect to compliance with arbitral awards. Confidentiality aside, as the size of a community increases, it becomes increasingly difficult for any given actor to keep track of the conduct and reputations of others. For these reasons, private enforcement is most likely to 56
Benson 1998, 95; Stone Sweet 2002, 325. Shepsle 1986, 71. 58 Private enforcement based on reputational sanctions likely plays an especially important role in enhancing rule-following by arbitrators. After all, arbitrators depend on disputants for employment, and disputants are unlikely to hire arbitrators with reputations for partiality, inefficiency, or infidelity to the rules set by the disputants. 59 See Stone Sweet 2002, 325 (“This solution, of course, depends entirely on the organization of information and monitoring capacities, a collective good that, given the myriad costs involved, may or may not be generated by the traders themselves.”). 60 See Guzman 2002, 1862f (“The extent to which a violation is known by the relevant players affects the reputational consequences of the violation. Obviously, if a violation takes place, but no other state has knowledge of it, there is no reputational loss. The reputational consequences will also be less if only a small number of countries know of the violation.”). 57
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play a significant role in rule-following in relatively small, well-defined, and enduring communities, in which the parties are able to monitor each other and are likely to have repeated interactions. The implication is that the transnational commercial arbitration system—which operates at a global scale—probably cannot rely primarily on reputational sanctions to mitigate enforcement problems. Enforcement problems in transnational commercial arbitration have also been addressed by domestic courts. They help solve these problems both by enforcing arbitration agreements and arbitral awards in particular cases, and by discouraging noncompliance in the first place by signaling to transnational commercial actors that judicial enforcement is likely. First, when one party to an arbitration agreement fails to abide by that agreement, the other party can seek judicial enforcement of the agreement.61 And when a party against whom an arbitral award has been issued fails to comply with that award, the other party can seek judicial enforcement of that award. As discussed above, states have provided the foundations for judicial enforcement through international and domestic law. However, judicial enforcement is privately triggered in the sense that it depends on a request from one of the disputants. In addition, domestic courts can support the rules governing transnational commercial arbitration by refusing to enforce arbitration agreements or arbitral awards that are inconsistent with those rules. For example, they can support the rule that arbitration requires the consent of the disputants by refusing to enforce arbitration agreements that are null and void as the result of fraud.62 Similarly, they can support the rule that disputants must have notice of arbitral proceedings and an opportunity to present their cases by refusing to enforce awards that result from proceedings in which a disputant received no such notice or had no such opportunity.63 And they can support the rule that arbitrators shall not exceed the scope of authority granted to them by the disputants and permitted by law by refusing to enforce awards that exceed that scope.64 61
Domestic courts can use a variety of methods to enforce an arbitration agreement, including an order compelling arbitration, an order dismissing or staying litigation of disputes that are covered by an arbitration agreement, or an “anti-suit injunction” prohibiting a party from filing or proceeding with litigation of such a dispute in a foreign court. For a detailed analysis of the various methods used by domestic courts to enforce transnational commercial arbitration agreements, see Born 2009, chap. 7. 62 See the exception to enforcement in Article II(3) (“unless [the court] finds that the [arbitration agreement] is null and void, inoperative or incapable of being performed”). 63 See the exception to enforcement in Article V(1)(b) of the New York Convention (“The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case.”) 64 Blackaby & Partasides 2009, 314f, 598. See, for example, the exception to enforcement in Article V(1)(c) of the New York Convention (“The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration . . . .”). http://www.bepress.com/bap/vol12/iss3/art10 DOI: 10.2202/1469-3569.1324
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Empirical evidence suggests that domestic courts play a significant role in the enforcement of awards following transnational commercial arbitration. For example, a survey on the post-award experience of claimants in 205 transnational commercial arbitrations in the AAA between 1999 and 2002 reveals considerable levels of post-award judicial involvement. In 100 cases, the claimant prevailed and the award debtor eventually complied fully or partially with the award.65 Of those one hundred cases, there was judicial confirmation of the award in sixtyeight cases and judicial enforcement in twelve cases.66 Even then, full compliance was the result in only seventy-four of the one hundred cases, while there was partial compliance in four cases and the parties renegotiated the award in twenty-two cases. Of the remaining 105 cases, the award debtor failed to comply in thirty-five cases; a court vacated the award in one case; fifty-one cases were still pending in a court action; and the claimant lost in eighteen cases.67 A more recent study estimates that the U.S. federal district courts have been called upon hundreds of times to enforce arbitral awards covered by the New York Convention.68 Second, domestic courts mitigate enforcement problems by signaling to transnational commercial actors that they are likely to enforce arbitration agreements, arbitral awards, and the rules governing the transnational commercial arbitration system.69 Other things being equal, the higher the perceived probability of judicial enforcement, the higher the probability that transnational actors will comply before actual judicial enforcement is necessary. After all, as the probability of judicial enforcement increases, the willingness of a party to incur the costs needed to resist enforcement should decrease.70 This perceived probability is largely a function of the prior published enforcement decisions of 65
Naimark & Keer 2005, 271. Naimark & Keer 2005, 271. 67 Naimark & Keer 2005, 271. As the authors note: “A total of 35 cases reported non-compliance with the award. Fifty-one cases were unresolved at the time of the survey and were pending in a court action of some type. Those 51 cases tended to be the most recently awarded matters and had not, therefore, sufficiently ‘ripened’ to demonstrate a final result. While we have no further data on the final outcomes of those 51 cases it seems likely that they will eventually show the same patterns of post-award results as the other 154 cases [i.e. compliance in 118 cases, non-compliance in 35 cases, award vacated in 1 case].” Naimark & Keer 2005, 271. 68 Whytock 2008b, 63-67. 69 See Drahozal 2009, 1040 (“While it appears that most international arbitration awards are complied with voluntarily, the available empirical evidence suggests that public courts nonetheless play an important role in the process.”); Whytock 2008a, 470 (“Transnational [arbitration] to an important extent . . . relies on domestic courts for enforcement.”). 70 This is a simple extension of the basic economic model of the decision to litigate. According to that model, a plaintiff will only file a claim if the expected value of the claim (which equals the probability that the plaintiff will win (p) times the amount of recovery if it wins (w)), less the costs of suit, is greater than zero. The so-called “filing condition” is thus (p*w)-c>0. Bone 2003, 34. 66
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domestic courts. The higher the rate of enforcement in those decisions, the higher the perceived probability of future enforcement. Thus, perhaps even more important than judicial enforcement in particular cases is the expectation of judicial enforcement in potential future cases. A disputant’s rule-following behavior thus depends significantly on the anticipated behavior of domestic courts—namely, the disputant’s expectations about whether a domestic court will enforce an arbitration agreement or arbitral award if the disputant fails to comply with it. This impact of domestic court decisions on the behavior of transnational actors beyond the parties to particular disputes is an example of the “transnational shadow of the law.”71 To shed empirical light on judicial signaling regarding the enforcement of arbitral awards, I created a dataset of all U.S. federal district court decisions between 1970 and 2008 published in the Westlaw database involving enforcement of arbitral awards covered by the New York Convention.72 I coded each decision based on whether it was a decision to enforce the arbitral award in full or not. If the decision was to enforce in full, the decision was coded as “yes”; otherwise, the decision was coded as “no.”73
Table 2 Enforcement Rates of Arbitral Awards Covered by the New York Convention Award Fully Enforced?
Number of Decisions
Percentage of Decisions
Yes
112
77.2%
No
33
22.8%
Total
145
100.0%
Note: This table presents the rate at which the U.S. federal district courts have fully enforced arbitral awards covered by the New York Convention in published decisions between 1970 and 2008.
71
Whytock 2009, 29f. The search was conducted on October 10, 2008. For details regarding the dataset, see Whytock 2008b, 57f. 73 Occasionally, awards are partially enforced or enforcement decisions are stayed pending the outcome of parallel foreign proceedings to vacate or set aside an award. I coded these decisions as “no,” indicating that there was not full enforcement. For coding details, see Whytock 2008b, 72f. 72
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The results, presented in Table 2, show that between 1970 and 2008, the U.S. federal district courts have fully enforced arbitral awards covered by the New York Convention at an estimated rate of 77.2 percent in their published decisions.74 The signal that appears is that attempts to resist enforcement are more likely than not to fail. It is more by creating these expectations than by providing enforcement in particular cases that domestic courts support the transnational commercial arbitration system.75 At the same time, my findings suggest that the U.S. district courts are also sending the signal that they do not automatically enforce arbitral awards, but are instead willing to perform a monitoring role, as the New York Convention allows them to do, to evaluate whether particular arbitral proceedings are consistent with minimal due process standards and public policy.76 This willingness may not only enhance the perceived legitimacy of the transnational commercial arbitration system, but also help address the concerns of some practitioners about the lack of a right of appeal in arbitration.77 By preventing domestic courts from performing their monitoring role in the transnational commercial arbitration system, states risk eroding the system’s legitimacy. For example, a law adopted by Belgium in 1985 barred review of arbitral awards by Belgian courts in arbitrations not involving Belgian citizens or businesses located in Belgium. As Moses explains: “It was believed at the time that this would increase the number of arbitrations in Belgium. In fact, however, the law had the opposite effect. Businesses were not drawn to a system with no possible court review. It appeared instead that businesses were avoiding Belgium 74
In 3.5% of published decisions, the U.S. district courts either partially enforced the award or stayed enforcement proceedings. Whytock 2008b, 72f. Based on the theory that judges are less likely to publish mundane decisions and the assumption that judges view enforcement of arbitral awards to be the norm, it is possible that the overall enforcement rate, including in unpublished decisions, is higher than in published decisions. See Drahozal and Naimark 2005, 264. 75 Whytock 2008a, 470f. 76 See e.g. New York Convention, Article V(1)(a) (“Recognition and enforcement of the award may be refused . . . [if] . . . [t]he party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case . . . .”), Article V(1)(d) (allowing refusal to recognize or enforce an arbitral award when “the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place”), and Article V(2)(b) (“Recognition and enforcement of an arbitral award may . . . be refused if the competent authority in the country where recognition and enforcement is sought finds that [t]he recognition or enforcement of the award would be contrary to the public policy of that country.”). 77 Born (2006, 6) summarizes the tradeoff: “Dispensing with appellate review reduces both litigation costs and delays. On the other hand, it also means that wildly eccentric, or simply wrong, arbitral decisions cannot be corrected.”). Callahan (2006, 31, 49) has found that a major reason for preferring litigation over arbitration is the availability of appellate review in litigation. Published by Berkeley Electronic Press, 2010
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as a place of arbitration.”78 Belgium therefore amended the law in 1998, allowing parties to opt out of judicial review, but no longer barring such review.79 In summary, both private actors and state actors help mitigate enforcement problems in the transnational commercial arbitration system. Private actors do so by applying reputational sanctions. States, through their domestic courts, do so by enforcing arbitration agreements and arbitral awards in particular disputes, and fostering expectations of enforcement in potential future disputes. 5. Conclusion Although global governance scholars have tended to treat the transnational commercial arbitration system as a private form of global governance, this article has shed light on the role of the state in that system. Specifically, I have argued that both rule-making and enforcement in the system depend largely on interactions between private and public actors. Therefore, I suggest that scholars treat the transnational commercial arbitration system as a mixed private-public form of governance and devote more effort to understanding private-public interaction in the system. An improved understanding of private-public interaction in transnational commercial arbitration will help scholars contribute more effectively to the solution of difficult normative problems and theoretical puzzles. Normatively, the question of private-public interaction goes to the heart of hopes and fears about the transnational commercial arbitration system. On the one hand, scholars have noted that by reducing the reach of state control over transnational business, the system can decrease transaction costs and increase private autonomy in transnational commercial relations.80 On the other hand, scholars have expressed concern that by freeing transnational business actors from state-based legal regulation, the system may unduly prioritize facilitation of transnational business transactions over other objectives of public policy such as distributive justice and the regulation of the negative externalities of transnational business activity.81 But the extent to which these hopes and fears reflect reality depends largely on the nature and extent of state involvement in the transnational commercial arbitration system. Thus, by improving our understanding of private-public interaction in 78
Moses 2008, 57. Moses 2008, 57. 80 See, e.g., Mattli 2001, 921; Stone Sweet 2006, 627. 81 See, e.g., Cutler 2003, 226. As Wai (2002, 212, 231) puts it in an important law review article, by contributing to “the transnational liftoff of international business transactions from national regulatory oversight,” the transnational commercial arbitration system may undermine “worthwhile policy objectives such as distributive justice, democratic political governance, or effective transnational regulation.” 79
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transnational commercial arbitration, we can improve our understanding of both its promises and perils. A better understanding of private-public interaction is also necessary to solve one of the central puzzles of the transnational commercial arbitration system: What explains state support for that system? Broad support was not inevitable. States could have instead attempted to preserve transnational litigation in domestic courts as the dominant method of transnational commercial dispute resolution and a leading instrument of state governance of transnational commercial activity. From a traditional state-focused perspective on world politics, this alternative would have seemed most likely. Why would states encourage a system of global governance in which they substantially share power with private actors? One theory emphasizes private political pressure on states to support arbitration as a transnational dispute resolution alternative to litigation,82 while another emphasizes economic competition among states to attract transnational arbitration business.83 Central to both accounts are interactions between private and public actors. By exploiting cross-national and temporal variation in states’ adoption of the various domestic and international legal instruments that support the transnational commercial arbitration system, and with careful historical process tracing, scholars can begin refining and empirically testing these theories. Finally, while my primary goal in this article is to nudge global governance scholarship on transnational commercial arbitration in a direction that more strongly focuses on private-public interaction, this article also has implications for the study of global governance more generally. Descriptively, the article raises the possibility that there may not be purely private (or, for that matter, purely public) forms of global governance. Analytically, even though it is important to understand the distinct roles of private and public actors in global governance, the article raises doubts about the desirability of a sharp conceptual distinction between private and public forms of global governance. Scholars who insist too strongly on this distinction run the risk of obscuring important interactions between private and public actors. Theoretically, this article implies that accounts of global governance processes—including rule-making and enforcement processes—will remain incomplete if they lack an account of how private and public actors interact in those processes.
82 83
E.g. Born 2009, 49f.; Dezalay & Garth 1996, 43f. O’Hara & Ribstein 2009, 98-101.
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Appendix: List of Acronyms AAA:
American Arbitration Association
ECOSOC:
United Nations Economic and Social Council
FAA:
U.S. Federal Arbitration Act
ICC:
International Chamber of Commerce
ICDR:
International Centre for Dispute Resolution of the American Arbitration Association
LCIA:
London Court of International Arbitration
UNCITRAL: United Nations Commission on International Trade Law UNIDROIT: International Institute for the Unification of Private Law
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Born, Gary B. 2009. International Commercial Arbitration. The Netherlands: Wolters Kluwer. Büthe, Tim. 2004. “Governance through Private Authority: Non-State Actors in World Politics.” Journal of International Affairs 58 (1): 281-290. Callahan, Rebecca. 2006. “Arbitration v. Litigation: The Right to Appeal and Other Misperceptions Fueling the Preference for a Judicial Forum.” bepress Legal Series, Working Paper 1248. Available at http://law.bepress.com/expresso/eps/1248. Caporaso, James A. Caporaso, Herbert P. Kitschelt, Erik M. Wibbels, and Steven I. Wilkinson. 2008. “Introduction: Fortieth Anniversary Issue.” Comparative Political Studies 41 (4/5): 405-411. Cutler, A. Claire. 1995. “Global Capitalism and Liberal Myths: Dispute Settlement in Private International Trade Relations.” Millennium: Journal of International Studies 24 (3): 377-397. Cutler, A. Claire. 2001. “Globalization, the Rule of Law, and the Modern Law Merchant: Medieval or late Capitalist Associations?” Constellations 8 (4): 480-502. Cutler, A. Claire. 2003. Private Power and Global Authority: Transnational Merchant Law in the Global Political Economy. Cambridge: Cambridge University Press. Cutler, A. Claire, Virginia Haufler, and Tony Porter. 1999. Private Authority and International Affairs. Albany, NY: State University of New York Press. Dahl, Robert. 1961. Who Governs? Democracy and Power in an American City. New Haven: Yale University Press. Dasser, Felix. 2008. “Mouse or Monster? Some Facts and Figures on the Lex Mercatoria.” In Globalisierung und Entstaatlichung des Rechts, Teilband II 2008, edited by Reinhard Zimmermann. Tübingen, Germany: Mohr Siebeck, 129-158. Dezalay, Yves and Bryant G. Garth. 1996. Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order. Chicago: University of Chicago Press. Drahozal, Christopher R. 2005. “Contracting Out of National Law: An Empirical Look at the New Law Merchant.” Notre Dame Law Review 80 (2): 523552. Drahozal, Christopher R. 2008. “Busting Arbitration Myths.” University of Kansas Law Review 56 (3): 663-677. Drahozal, Christopher R. 2009. “Private Ordering and International Commercial Arbitration.” Penn State Law Review 113 (4): 1031-1050.
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Drahozal, Christopher R. and Richard W. Naimark. 2005. Towards a Science of International Arbitration: Collected Empirical Research. The Hague: Kluwer Law International. Drahozal, Christopher R. and Stephen J. Ware. 2010. “Why Do Businesses Use (or Not use) Arbitration Clauses?” Ohio State Journal on Dispute Resolution 25 (2): 433-476. Eisenberg, Theodore and Geoffrey P. Miller. 2007. “The Flight from Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in Publicly-Held Companies’ Contracts.” DePaul Law Review 56 (2): 335-374. Gal-Or, Noemi. 2008. “Dispute Resolution in International Trade and Investment Law: Privatisation of the Public?” In Transnational Private Governance and its Limits, edited by Jean-Christophe Graz and Andreas Nölke. New York: Routledge, 209-221. Graz, Jean-Christophe and Andreas Nölke, eds. 2008. Transnational Private Governance and its Limits. New York: Routledge. Guzman, Andrew T. 2002. “A Compliance-Based Theory of International Law.” California Law Review 90 (6): 1823-1887. Hall, Rodney Bruce and Thomas J. Biersteker, eds. 2002. The Emergence of Private Authority in Global Governance. Cambridge: Cambridge University Press. Hong Kong International Arbitration Centre (HKIAC). 2009. “Case Statistics.” Available at http://www.hkiac.org/show_content.php?article_id=9 (accessed December 15, 2009). International Chamber of Commerce. 2009. “2008 Statistical Report.” ICC International Court of Arbitration Bulletin 20 (1): 5-16. International Institute for the Unification of Private Law. 1994. “Principles of International Commercial Contracts.” Available at http://www.unidroit.org/english/principles/contracts/principles1994/1994f ulltext-english.pdf. Kerr, Michael. 1997. “Concord and Conflict in International Arbitration.” Arbitration International 13 (2): 121-144. Kjaer, Anne Mette. 2004. Governance. Cambridge: Polity Press. Lasswell, Harold D. 1936. Politics: Who Gets What, When, How. New York: McGraw-Hill Mattli, Walter. 2001. “Private Justice in a Global Economy: From Litigation to Arbitration.” International Organization 55 (4): 919-947. McIlwrath, Michael and Roland Schroeder. 2008. “The View from an International Arbitration Customer: In Dire Need of Early Resolution.” Arbitration 74 (1): 3-11. Moses, Margaret L. 2008. The Principles and Practice of International Commercial Arbitration. Cambridge: Cambridge University Press.
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Naimark, Richard W. and Stephanie E. Keer. 2005. “Post-Award Experience in International Commercial Arbitration.” In Towards a Science of International Arbitration: Collected Empirical Research, edited by Christopher R. Drahozal and Richard W. Naimark. The Hague: Kluwer Law International. North, Douglass C. 1993. “Institutions and Credible Commitment.” Journal of Institutional and Theoretical Economics 149 (1): 11-23. Nye, Joseph S., Jr. and Robert O. Keohane. 1971. “Transnational Relations and World Politics: An Introduction.” International Organization 25 (3): 329349. O’Hara, Erin A. and Larry E. Ribstein. 2009. The Law Market. Oxford: Oxford University Press. Reisman, Michael W. 1992. Systems of Control in International Adjudication and Arbitration: Breakdown and Repair. Durham: Duke University Press. Shepsle, Kenneth A. 1986. “Institutional Equilibria and Equilibrium Institutions.” In The Science of Politics, edited by Herbert F. Weisberg. New York: Agathon Press, 51-81. Stone Sweet, Alec. 2002. “Islands of Transnational Governance.” In On Law, Politics, and Judicialization, edited by Martin Shapiro and Alec Stone Sweet. Oxford: Oxford University Press, 323-342. Stone Sweet, Alec. 2006. “The New Lex Mercatoria and Transnational Governance.” Journal of European Public Policy 13 (5): 627-646. United Nations Commission on International Trade Law. 2006. UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006. Available at http://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/0786998_Ebook.pdf. Wai, Robert. 2002. “Transnational Liftoff and Juridical Touchdown: The Regulatory Function of Private International Law in an Era of Globalization.” Columbia Journal of Transnational Law 40 (2): 209-274. Whytock, Christopher A. 2008a. “Litigation, Arbitration, and the Transnational Shadow of the Law.” Duke Journal of Comparative and International Law 18 (2): 449-475. Whytock, Christopher A. 2008b. “The Arbitration-Litigation Relationship in Transnational Dispute Resolution: Empirical Insights from the U.S. Federal Courts.” World Arbitration and Mediation Review 2 (5): 39-82. Whytock, Christopher A. 2009. “Domestic Courts and Global Governance.” Tulane Law Review 84 (1): 67-123.
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Article 11
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Regulation and Economic Globalization: Prospects and Limits of Private Governance Frederick Mayer, Duke University Gary Gereffi, Duke University
Recommended Citation: Mayer, Frederick and Gereffi, Gary (2010) "Regulation and Economic Globalization: Prospects and Limits of Private Governance," Business and Politics: Vol. 12 : Iss. 3, Article 11. Available at: http://www.bepress.com/bap/vol12/iss3/art11 DOI: 10.2202/1469-3569.1325 ©2010 Berkeley Electronic Press. All rights reserved.
Regulation and Economic Globalization: Prospects and Limits of Private Governance Frederick Mayer and Gary Gereffi
Abstract Corporate codes of conduct, product certifications, process standards, and other voluntary, non-governmental forms of private governance have proliferated in the last two decades. These innovations are a response to social pressures unleashed by globalization and the inadequacy of governmental institutions for addressing its social and environmental impacts. Private governance has had some notable successes, but there are clear limits to what it alone can be expected to accomplish. We hypothesize that the effectiveness of private governance depends on four main factors: 1) the structure of the particular global value chain in which production takes place; 2) the extent to which demand for a firm’s products relies on its brand identity; 3) the possibilities for collective action by consumers, workers, or other activists to exert pressure on producers; and 4) the extent to which commercial interests of lead firms align with social and environmental concerns. Taken together, these hypotheses suggest that private governance will flourish in only a limited set of circumstances. With the trend towards consolidation of production in the largest developing countries, however, we also see a strengthening of some forms of public governance. Private governance will not disappear, but it will be linked to emerging forms of multi-stakeholder institutions. KEYWORDS: private governance, global value chains, corporate social responsibility, globalization Author Notes: Frederick Mayer is Associate Professor of Public Policy and Political Science and Director of the Program on Global Policy and Governance at Duke University. He can be reached via email at
[email protected]. Gary Gereffi is Professor of Sociology and Director of the Center on Globalization, Governance & Competitiveness at Duke University. He can be reached via email at
[email protected]. The authors wish to thank Tim Büthe and two anonymous reviewers for their comments on drafts of this paper, and especially our research assistant, Ingrid Mujica, for her outstanding research and editorial assistance.
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1. Introduction The last two decades have witnessed a remarkable burst of innovation in “private governance,” i.e., non-governmental institutions that “govern—that is they enable and constrain—a broad range of economic activities in the world economy.”1 These institutions serve functions that have historically been the task of governments, most notably that of regulating the negative externalities of economic activity.2 As the articles in this special issue attest, private governance takes many forms: standards governing a vast array of environmental, labor, health, product safety and other matters; codes of conduct promulgated by corporations, industry associations, and non-governmental organizations (NGOs); labels that rely on consumer demand for “green” and “fair trade” products; and even self-regulation by corporations under the banner of corporate social responsibility (CSR).3 The move towards private governance is best seen as a response to societal pressures spawned by economic globalization and by the inadequacy of public governance institutions in addressing them. As firms, production networks, and markets transcended national boundaries, public (governmental) systems of economic governance built on the unit of the nation-state proved inadequate for regulating an increasingly fragmented and footloose global economy. In the language of Polanyi, markets became “dis-embedded” from societal and state institutions.4 Logically, economic globalization demands global regulation, but at the international level regulatory standards are generally weak and there is little capacity to enforce them. In the developing world, where production is increasingly concentrated, many states lack the capacities of law, monitoring, and enforcement needed to regulate industry, even when they have strongly worded legislation on the books. The failure of public governance institutions to keep
1
Büthe 2010a; 2010b. Our use of “private governance” is essentially synonymous with “private regulation” as Büthe defines it, but we draw on a broader governance literature throughout this article. 2 Private governance may also serve functions other than regulation of externalities, including facilitating the formation and efficient functioning of markets and redressing the distributive consequences of market activities, but regulation has been the primary purpose of most private governance. The taxonomy of facilitative, regulatory and compensatory modes of market governance is addressed more fully in Gereffi and Mayer 2006. 3 Cafaggi and Janczuk (2010) do not include self-regulation in their definition of private regulation. We include it here on the grounds that corporations (or more precisely the people who run them) can internalize norms of appropriate corporate behavior that alter their behavior. 4 Polanyi 1944. See also Evans 1985; Ruggie 1982. Published by Berkeley Electronic Press, 2010
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pace with economic globalization has, therefore, created a global “governance deficit.”5 As Polanyi would predict, workers, environmentalists, human rights activists, and others in civil society have mobilized to demand new forms of governance. Part of this response focused on attempting to alter public policies— i.e., pushing back against neo-liberal economic prescriptions or demanding that market opening be accompanied by regulatory measures. Frustrated with the perceived inability of governmental institutions to respond to the governance challenge, however, many social activists and labor groups also turned to pressure campaigns targeted at corporations and to other strategies designed to use market pressure to regulate the behavior of producers. That such developments have had an impact is not in question. Fair Trade coffee, “sweatshop free” collegiate apparel, and Forest Stewardship Councilcertified lumber have all altered specific production practices. Even Walmart, the poster child of corporate malfeasance in the eyes of many activists, is now beginning to respond to social pressures for reform by stocking energy-efficient light bulbs, using environmentally friendly packing materials, and so on.6 But the questions are: How far will this go? To what extent can private governance address the global governance deficit? Will private governance require complementary forms of public regulation, and where might this public regulation come from? Much is happening, but there is no good overall assessment of whether these myriad private governance initiatives are anywhere close to sufficient to address the full range of labor, environmental and other social concerns. Most research to date has been largely descriptive and anecdotal. Clearly, more is needed if we are to understand the impact of private regulatory governance. A necessary first step is to develop clearer theoretical propositions about the conditions under which various forms of private government are likely to succeed and, just as importantly, where they are unlikely to do so. In this paper, we offer six hypotheses about the conditions under which private governance is most likely to arise and to be effective, as well as for thinking about the interaction between private and public governance. Before turning to those hypotheses, it is necessary to consider the forces that underlie the move towards private governance, particularly those changes in the global economy that both created demand for new governance and enabled its supply. Although we are largely concerned in this paper with private governance, public and private governance interact. Indeed, it was a failure of public governance that led private modes of governance to emerge and proliferate. Ultimately, as we will 5
The phrase was first used by Peter Newell (see Vogel 2009). This line of argument is developed more fully in Gereffi and Mayer 2006. 6 Gereffi and Christian 2009. http://www.bepress.com/bap/vol12/iss3/art11 DOI: 10.2202/1469-3569.1325
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argue, the limits of purely private governance will likely spur renewed attention to public governance and to new forms of public and private governance interaction. 2. The Demand for Governance: Economic Globalization and the Public Governance Deficit Private governance arose in particular historical circumstances. In the world before globalization, although there was economic interdependence among advanced industrial countries,7 large regions of the globe were not connected to the global market. In the mid-1980s, the Soviet Union, China, and Eastern and Central Europe still had centrally planned economies; high levels of protection and state ownership characterized most of Latin America; and boycotts isolated South Africa while the rest of sub-Saharan Africa barely registered. The last 25 years have witnessed a dramatic restructuring of economic activity around the globe, in large part because of changes in the policy environment. The collapse of communism in Europe and its transformation in China, the abandonment of import substitution policies in Latin America and elsewhere (driven, in no small measure, by the International Monetary Fund (IMF)), and the expansion and deepening of the international trading rules in the World Trade Organization (WTO) and in ever more numerous regional and bilateral agreements, dramatically transformed the environment for global commerce. The global economy that has emerged since the 1980s has two distinctive features with profound implications for public governance. First, a substantial portion of global manufacturing production—and increasingly of services as well—has shifted from the developed to the developing world.8 Once largely outside the global production system, China, India, Brazil, Mexico, South Africa, and other big developing countries are now host to a very significant and rapidly growing portion of international manufacturing output. By 2000, half of all manufacturing production was in the developing world, and 60 percent of exports from developing countries to the industrialized world were no longer raw materials but manufactured goods.9 Second, and equally important for governance, the organization of global production has changed dramatically. Historically, the vast majority of manufacturing production was carried out either by national companies and their suppliers within single countries or by multinational corporations (MNCs) based in developed economies that typically owned all or most of their foreign
7
Keohane and Nye 1977. Dicken 2007. 9 Held and McGrew 2002. 8
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factories.10 Today, the global economy is increasingly organized around international production networks in which large lead firms, often located in developed economies, control to a significant extent the production of suppliers, who are typically smaller and likely to be located in developing countries.11 Variously referred to as global commodity chains,12 global value chains,13 and global production networks,14 this new form of international industrial organization has allowed for production to be coordinated on transnational scales but with far greater flexibility than the older MNC model of direct ownership.15 Key to understanding the implications of global production systems is the role of lead firms in these networks and chains. Producer-driven chains dominate capital- and technology-intensive industries such as automobiles, aircraft, and computers. Buyer-driven chains have become the new model of global sourcing in labor-intensive manufacturing industries like apparel, footwear, and toys, a development led by large U.S. retailers, marketers, and “manufacturers without factories.”16 More recent studies point to the emergence of new drivers, such as large supermarkets and concentrated food processors.17 In all of these cases, lead firms enjoy some measure of market power over suppliers and some ability, therefore, to affect their behavior. Changes in the global economy have profound implications for public and private governance. On the one hand, they undermine public governance. When production largely involved national firms or vertically integrated MNCs based in developed countries, regulation--whether labor, environmental, health, or other— was undertaken by individual nation states (roughly coordinated in a system Ruggie characterized as “embedded liberalism”).18 The shift to offshore outsourcing over the past several decades meant that much of global production was now beyond the reach of national governance institutions in the advanced industrial states and extended beyond the international system of embedded liberalism that was largely confined to the industrialized world. Governments in those developing countries where production increasingly took place lacked the ability, and to some extent the will, to regulate production in their jurisdictions. The formerly centralized economies of China and Eastern Europe had no tradition of market governance, the newly opened economies of Latin America had little 10
Kaplinsky 2005; Ocampo 2010, 1-12. Dicken 2007. 12 Bair 2009. 13 Gereffi and Kaplinsky 2001. 14 Henderson et al 2002. 15 Gereffi 2005. 16 Gereffi and Korzeniewicz 1994; Gereffi 1999. 17 Dolan and Humphrey 2004; Gereffi, Lee and Christian 2009. See also Fuchs and Kalfagianni 2010. 18 Ruggie 1982. 11
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regulatory capacity, and most of sub-Saharan Africa had weak public governance of any form. Moreover, initially at least, the interests of most developing countries lay in attracting investment, which meant that they tended to give relatively short shrift to regulatory concerns. And at the international level, public regulation remained very weak. International organizations such as the International Labor Organization (ILO), the United Nations Environmental Programme (UNEP), and the United Nations Development Programme (UNDP) have extremely limited powers, and are certainly less well developed than are market facilitative organizations, such as the WTO, the IMF, and the World Intellectual Property Organization (WIPO). Indeed, the relative strength of these facilitative forms of international public governance may well have inhibited certain forms of regulation and exacerbated unequal income distribution at the global level.19 Changes in the international economy, therefore, can be seen as creating a vacuum or deficit of public regulation. But it is important to recognize that new patterns of industrial organization, notably the concentration of power in lead firms within global production networks, also created possibilities for private governance. 3. Social Responses and the Rise of Private Governance As Polanyi would predict, the dis-embedding of markets from governance provoked a social response. Initially, the targets of social activism were international organizations associated with globalization—the IMF, the World Bank, and the WTO—but progress from the standpoint of the activists was extremely limited.20 Frustrated by the lack of governmental response, many social activists began to shift to direct pressure on corporations to change their behavior.21 Beginning in the early 1990’s, demand for corporate codes of conduct, perhaps the most visible and widespread form of private governance, became the opening wedge in a 15-year campaign to bring some elements of social responsibility to international subcontracting networks.22 The genius of this approach was in recognizing that the industrial governance structures established by lead firms to manage their global supply chains could also be leveraged to achieve social and environmental objectives. 19
Ocampo 2010. In the North American Free Trade Agreement (NAFTA) negotiations, public opposition forced the Clinton Administration to add supplemental agreements on labor and environment (Mayer 1998), and many bi-lateral and regional trade agreements have at least weak social clauses, but efforts to incorporate similar provisions at the global level have not been successful. 21 Vogel 2009. 22 Gereffi, Garcia-Johnson and Sasser 2001. 20
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Many innovations in private governance began in the apparel sector, which was a forerunner of globalization in other manufacturing industries because of its labor-intensive production and relatively low barriers to entry. Levi Strauss, the American jeans maker, was one of the first MNCs to tout its own corporate code of conduct in 1991, using provisions against employing forced labor and child labor to justify its unwillingness to source from China (unlike many of its competitors, who already were making clothes there). Other multinationals in the apparel industry such as Liz Claiborne, Nike, Reebok and Gap soon followed suit, but these first-party codes had little external credibility because individual firms proclaimed and monitored their own rules.23 While first-party codes became commonplace in certain industries, second-party codes of conduct were developed by trade associations to apply to their industry members (such as Responsible Care in the chemical industry). 24 Second-party codes were soon followed by third-party certification arrangements, whereby an external group (often an NGO) monitored provisions adopted by particular firms or industries. While many argued that the early codes had no teeth and built-in conflicts of interest, these newer codes of conduct had stricter provisions and, most importantly, an independent monitoring mechanism that was not controlled by the firms whose behavior was being scrutinized.25 This allowed domestic and international NGOs to play a significant role not only in detecting exploitative labor practices in global supply chains, but also to use wellcoordinated campaigns to force leading multinationals with highly visible brands, such as Nike, Disney, and Starbucks, to improve working conditions in their global network of suppliers and to participate in equity-oriented programs like the Fair Trade movement.26 By the mid-2000s, a large number of multinational firms were publishing annual Corporate Social Responsibility reports.27 Furthermore, under pressure from a wide range of NGOs and labor groups, private governance regimes were becoming more pervasive: industry-wide codes of conduct proliferated and became more transparent.28 The monitoring reports and complete lists of suppliers for well known brands like Nike were made public, and instead of abandoning suppliers that violated the corporate codes, MNCs were pressured to get domestic suppliers to comply with the global codes.
23
See Starobin and Weinthal (2010) for a discussion of the credibility problem in certification regimes. 24 Gereffi, Garcia-Johnson and Sasser 2001. 25 Kolk and van Tulder 2004; Locke, Qin and Brause 2007; Locke and Romis 2007. 26 Klein 2000; Esbenshade 2004. 27 e.g., Gap Inc. 2004. 28 Kolk and van Tulder 2005. http://www.bepress.com/bap/vol12/iss3/art11 DOI: 10.2202/1469-3569.1325
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Private governance has continued to evolve. The list of agricultural, craft, and other products in the Fair Trade line is expanding, as are organic and greenlabeled goods. Examples abound of various types of socially responsible corporate practices. McDonald’s recently tightened its procurement guidelines in response to the clear-cutting practices of Amazon soy producers and cattle ranchers who supplied the industry. Cadbury champions its commitment to the communities that grow its cocoa. Walmart has mandated energy savings throughout its supply chain. And in many sectors there are now jointly agreed upon codes and standards for such things as greenhouse gas emissions accounting,29 sustainable timbering practices,30 labor practices in apparel and footwear,31 electrical product safety standards,32 and many others. Notwithstanding the impressive dynamism of private governance, however, it remains far from filling the public governance vacuum. For one thing, there is great variation in coverage. In some well known sectors, private governance appears reasonably robust—apparel, for example—but even within that sector much production remains outside the private governance regime. Moreover, even when there are rules and standards in place, there is often less than meets the eye. The existence of a code does not guarantee that it will be observed or enforced. Although there is a large and growing literature describing trends in private governance, to date there have been few attempts to develop propositions that would enable us both to explain the observed pattern of private regulation and to predict its likely trajectory. Notable exceptions are Vogel33 and Mattli and Woods,34 whose conceptualization of private governance as arising from the interplay of demand and supply factors provides a very useful starting point for further theorizing. Central to their thinking, and ours, is the interaction between private and public governance. Developments in each realm have implications for the other. Indeed, as Whytock convincingly demonstrates, it is often impossible to disentangle the two.35 4. Six Hypotheses Based on our review of the extant literature and our ongoing research on numerous supply chains, as well as our assessment of the evolving dynamic 29
Green 2010. Bartley 2010. 31 Bartley 2010. 32 Büthe 2010b. 33 Vogel 2008. 34 Mattli and Woods 2009a; 2009b. 35 Whytock 2010. 30
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between public and private governance, we propose six hypotheses about when and where private governance is most likely to succeed. The first four hypotheses can be thought of as predicting the domain in which we expect to see the most established and effective forms of private governance. Hypotheses five and six deal more explicitly with the relationship between public and private governance and are more forward looking. Our primary objective in this paper is the development of a coherent set of hypotheses rather than theory testing per se. Nevertheless, for each of our hypotheses, we provide not only the theoretical rationale but also offer illustrative examples in support of their plausibility. Hypothesis 1: The more economic leverage large lead firms have over smaller suppliers in their value chains, the greater is the potential impact and scope of private governance. The existence of lead firm leverage magnifies the importance of private governance to smaller firms in its chain, although the impact of this leverage will depend on the specificity of the relationship (as outlined in Hypotheses 2-4 below) rather than the relative size of the actors per se. To a great extent this is a matter of market concentration: firms with large market shares, whether marketers, retailers, or producers, usually have the option to source from many smaller suppliers, each of which may have few options other than doing business with the lead firm. As Fuchs and Kalfagianni observe in the case of private governance in food retail, “the dominance of a few corporations fosters their ability to limit the choices available to other actors, specifically suppliers and labor, who desire entry.”36 Of course, it is possible that even a very large buyer might have little leverage if it is dependent on supply from a small but unique supplier, but this is less common. Given that they have a wider range of alternatives than their suppliers, lead firms tend to have considerable power in their supply chains. The same leverage that can be used to demand lower prices and better quality from suppliers can also be used to press for better labor practices or greener production methods. This leverage is not simply a function of the lead firm's market share. Influence over supplier behavior may be limited by the relative transparency of practices, for instance. An implication of Auld et al’s article on technological innovations is that some supplier practices are easier to monitor than others, and should be easier for lead firms to govern.37 Moreover, the larger the supplier, the more options it, too, is likely to have (to sell to other retailers or producers, for example), which limits the power a lead firm has in its 36 37
Fuchs and Kalfagianni 2010. Auld et al 2010.
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chain. As Locke has pointed out in the apparel sector, for example, suppliers often have more options and lead firms less power than they might think. “For most apparel suppliers, individual global brands constitute but a small fraction of their total business. In this context, it is not at all clear that global buyers have the ability/leverage (let alone credibility) to pressure these suppliers.”38 It is no accident, therefore, that many of the most prominent cases of private regulatory governance involve very large lead firms with more-or-less captive suppliers. The success of the “classic” forms of private governance in the apparel industry— codes of conduct adopted by lead firms such as Levi Strauss, Nike, and Gap and imposed on their suppliers—depended on the power of those lead firms in their global value chains. More recently we have seen the adoption of private governance by a broader range of retailers. Walmart is perhaps the best publicized example. In the past few years, Walmart has launched a Sustainability Consortium through which it can use its considerable market power to demand certain environmental improvements by its suppliers.39 Global supermarket chains have promoted new private standards for food quality and safety, including product and process specifications with labor and environmental implications.40 Many supermarkets have also established their own supply chains in cut flowers, which has created an opening for labor groups to press for better working conditions among suppliers.41 Powerful lead firms have also been important in pushing the adoption of new industry standards promoted by NGOs. For example, the decision by Home Depot and Lowes, the two largest home improvement retailers, to recognize the standards of the Forest Stewardship Council (FSC) in the mid-1990s, led its major suppliers to adopt them as well.42 Hypothesis 2: Private governance is most likely for highly branded products and firms. When demand for a product is less a function of observable utility than of constructed brand identity, firms are more vulnerable to societal pressure. (Also, of course, being a highly recognized brand makes a firm an easily identifiable target for groups demanding regulation; a point to which we will return with our next hypothesis.) It is for this reason that many of the first lead firms to promote 38
Locke, Amengual and Mangla 2009, 12. GreenBizz, 17 August, 2010. Available at: http://www.greenbiz.com/blog/2009/08/17/insidewalmarts-sustainability-consortium. 40 Memodovic and Sheperd 2009. 41 Hughes 2000; Dolan and Humphrey 2004; Reardon and Hopkins 2006; Riisgaard 2009; Riisgaard and Hammer Forthcoming. 42 Gereffi, Garcia-Johnson and Sasser 2001; Bartley 2010. 39
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private governance regimes in their value chains were highly visible consumer brands such as Nike and Starbucks, whose market niche depends more on marketing than on the intrinsic qualities of their product. A comparison with other large lead firms less vulnerable to attack on their brand is instructive. For example, ADM and Cargill have enormous leverage in their agricultural chains, but because they have almost no brand identity with consumers, they are less vulnerable to societal pressure.43 Similarly, Flextronics, a very large supplier in the electronics industry, shapes supplier standards in its chains, but it faces little social pressure to drive private governance.44 Increasingly, firms who once competed solely on price and product have begun to see themselves as vulnerable as well. Walmart, for example, historically used its considerable power in its supply chains primarily to drive prices down, sometimes to the detriment of workers and the environment. But in the last few years, even Walmart has concluded that it needs to protect its reputation from social critiques.45 Large firms in every sector are now taking steps to reduce risks to their brand. McDonald’s, for example, faced with criticism about damage to Brazilian rainforests from clear-cutting for feed grains and cattle ranches, has compelled its suppliers to participate in a “Sustainable Cattle Working Group.”46 Defensive considerations appear to have been the biggest factor in these cases, but firms may also be pro-active with respect to their brand identity. So far, this appears to be most common with smaller niche firms. For instance, the Body Shop promotes itself as a socially responsible company, featuring its “Values & Campaigns” prominently on its webpage, and Patagonia’s “Footprint Chronicles” portray a positive image in terms of environmental sustainability in the making and sourcing of its products. Social labeling is a special case in which products are differentiated by their impact on workers or the environment, but follows a very similar logic. The increase in consumer demand for goods produced in socially responsible ways has made this new form of branding possible, as illustrated by the now-established market for “fair trade” coffee and other products, Forest Stewardship Council certified lumber, and the like. It is important to recognize how hypotheses 1 and 2 interact. In chains with both powerful lead firm drivers and high brand vulnerability, we would expect, and indeed see, the greatest advances in private governance. The success of the classic forms of private governance in the apparel industry—codes of conduct adopted by lead firms such as Levi Strauss, Nike, and Gap and imposed on their suppliers—depended on the market power of those lead firms in their
43
Gereffi and Christian 2010. Sturgeon and Lester, 2004. 45 Gereffi and Christian 2009. 46 Downie 2007; McDonald’s Corporation (2009), 18. 44
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global value chains, as well as these lead firms’ vulnerability that resulted from being a highly recognized brand. It is also useful to distinguish between firm-specific standards and those that are jointly adopted by several firms in the same sector in order to see how the former might evolve into the latter. In the apparel sector, once a critical mass of lead firms found it in their individual interests to adopt private codes, those firms had a collective interest in convergence on common standards—in part to minimize the compliance costs of suppliers who sold into more than one chain and in part because common standards allowed greater monitoring efficiency. The logic of this progression is very similar to that suggested by Büthe for the rise of the International Electrotechnical Commission and by Green in her discussion of the Greenhouse Gas Protocol, both instances in which industry-wide standards became focal points for coordinating the shared interests of firms in some common approach.47 Furthermore, once a common standard is established, first movers have a strong stake in persuading other competitors to adopt the standard, a dynamic that can also be observed in the apparel case. Hypothesis 3: Effective private governance is most likely in the face of effective societal pressure, which, in turn, depends on the relative ease of mobilizing collective action. Implicit in both Hypothesis 1 and Hypothesis 2 is the assumption that the ultimate driver of private governance is some form of external social pressure. Social pressure is necessary both in demanding new institutions of private governance— codes of conduct, for example—and, equally importantly, for ensuring that such regulations are actually observed.48 Bartley’s analysis of differences in the on-theground effectiveness of certification regimes for sustainably harvested timber and factory work conditions in Indonesia suggests the importance of sustained national and international pressure from civil society.49 Such pressure, however, is far from inevitable, depending as it does on collective action, whether by individual citizens or organized groups such as NGOs and labor unions. Even when there is agreement about the desirability of some collective good, such as better labor conditions or environmental protection, to the extent that the accomplishment of that goal requires the coordinated efforts of many and the enjoyment of the good cannot be restricted to those who acted to procure it, the temptation to free ride creates a major obstacle to mobilizing collective action.50 47
Büthe 2010a; 2010b; Green 2010. Vogel 2009. 49 Bartley 2010. 50 Olson 1965. 48
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One determinant of successful collective action is the extent of prior organization relevant to an issue. The existence of environmental organizations and labor unions, for instance, significantly lowers the cost of collective action for their members.51 When such organizations are present, we would expect to see greater social pressure on those issues on which they focus. Starobin and Weinthal’s discussion of kosher food standards demonstrate the way in which existing social structures lower costs of collective action by reducing monitoring costs.52 A related point made by Auld et al is that technology may lower the costs of collective action.53 A second factor in determining collective action might be called the inherent dramatic potential of the issue. As Bartley discusses with respect to the rise of private governance in Indonesia, public controversy regarding forest degradation and workplace conditions in footwear and apparel factories was essential.54 Drama may be related to the actual magnitude of a problem, but is far from identical to it. Some issues—abuses of children or the death of large marine mammals—are more emotive than others, and carry with them greater potential for both becoming an issue (because they are newsworthy) and spurring individuals to action. The pattern of successful activism for private governance (as well as its absence when appropriate conditions are not met) appears to bear out our hypothesis. We see most mobilization when there are opportunity structures that lower the cost of cooperation and/or where the issue was successfully dramatized. The case of dolphin-safe tuna fishing methods illustrates the point. The death of dolphins at the hands of tuna fishermen became a cause célèbre in the late 1980s, in no small part because dolphins are such appealing animals. The prior existence of numerous environmental groups with memberships and communication channels, poised to seize upon the issue, also made a significant difference. Activism spawned by outrage over the practice has, over time, led to a “dolphin safe” labeling regime and to decisions by large food retailers (including Walmart) to adopt the standard for their supply chains. Raising similar levels of awareness among activists and consumers for less easily dramatized practices has proven more difficult. Private governance has made only modest inroads in protecting other less glamorous fish.55 51
In social movement theory, “opportunity structures” are those institutions that facilitate collective action by lowering the costs of cooperation. See Tarrow 1998. 52 Starobin and Weinthal 2010. 53 Auld et al 2010. 54 Bartley 2010. 55 The Monterey Bay Aquarium has, for example, led an effort to persuade restaurants and consumers to serve and buy only fish on its “green” list and to shun those it lists as “red,” categories that reflect its evaluation of the extent to which they are sustainably harvested. Whole http://www.bepress.com/bap/vol12/iss3/art11 DOI: 10.2202/1469-3569.1325
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The “anti-sweatshop” movement related to collegiate apparel also demonstrates the importance of drama in mobilizing social pressure. In this case, collective action was necessary on two levels: to organize students at multiple campuses and to coordinate a collective response by the universities. Well publicized and extreme cases of exploitation provided a rallying point for college students, who were then able to pressure a consortium of universities to license only “sweatshop free” collegiate apparel.56 In the case of activist campaigns, it may not be necessary to actually mount an attack if the threat is sufficiently credible. Regulation results from avoidance of possible activist campaigns targeted at embarrassing disclosures of poor practices. Many forms of private regulation are a form of risk management by skittish executives. The actions taken by McDonald’s to address clear cutting of the Amazon forests by suppliers in its chain, for example, looks like a case in which the existence of environmental groups already actively working on deforestation, as well as a latent group of people ready to mobilize, created a very credible threat to McDonald’s corporate image. Before turning to our next hypothesis, it is useful to consider a related problem for collective action, that of failure in the market for information. The problem is that those who would demand accountability by corporations, whether in their role as consumers or as activists, cannot directly observe business practices. Such information is costly to obtain, and because it is a collective good, it is likely to be under-provided.57 Certification, as Starobin and Weinthal explore at some depth, is intended to solve the problem by providing an inexpressive signal, but the effectiveness of certification depends on the credibility of that signal. How, then, to certify the certifiers? In their analysis of kosher food certification, the key is existing institutions. “The success of kosher at a global scale derives from its continued reliance on the pre-existing social capital share among these tight-knit communities and the active participation of a vigilant consumer base in ongoing oversight.”58 Hypothesis 4: Private governance is most likely to be adopted when commercial interests align with social or environmental concerns. It should not be surprising that the willingness of firms to adopt private regulatory measures, whether by lead firms driving their suppliers or adoption by the Foods, the large organic food retailer, has now pledged to stop selling fish on the red list, but the major supermarkets have not adopted the standard and consumer awareness remains quite low. 56 Mandle 2000. 57 Downs 1957. 58 Starobin and Weinthal 2010. Published by Berkeley Electronic Press, 2010
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suppliers themselves, will depend in part on the cost of such measures. To the extent that standards can be met without incurring significant costs, or better yet, when they actually are cost-saving, they are much more likely to be adopted. Moreover, such measures will, in the long run, be most sustainable if there is a “business model” for them, because they establish or protect consumer demand for the brand, hedge against risks of becoming a target of activism, or reduce production costs.59 There is some reason to believe that, for instance, improvements in environmental practices—“greening the value chain” in the current parlance—are more likely to be aligned with financial interests of firms than are upgrades in labor conditions. To some extent this may be a function of differences between the cost of compliance for environmental rather than labor provisions. Walmart’s recent well-published efforts to replace lights in its stores with LED lighting illustrates the point. These actions are good for the environment, but they are also, in the long-run, a cost-saving measure. To summarize before turning to our last two hypotheses: pressure for private governance should be greatest when there is a powerful lead firm in a stable value chain, when that firm is highly branded and therefore vulnerable to shifts in consumer preferences, when there is potential for mobilizing social pressure, and when private governance is most consistent with commercial interests. These propositions are consistent with Vogel’s assessment of the rise and potential for “civil regulation,” particularly his emphasis on the role of societal pressures that create demand for it. And, like Vogel, we distinguish between the existence of rules and their effectiveness. To a greater extent than Vogel, though, we emphasize the implications of industrial structure for the supply of private governance, and the factors that affect collective action on the demand side. Notwithstanding the successes of private governance that we have been describing, our four hypotheses also suggest the limits to what it can accomplish. A great deal of global production does not meet one or more of our conditions. Much production takes place in chains and networks with no clear drivers. For every highly branded product vulnerable to consumer pressure, there are many unbranded products. And there remain considerable obstacles to collective action needed to mobilize and sustain social pressure on business. Moreover, when private regulation is costly and does not fit a firm’s business model, firms are quite capable of resisting. Even in the best of cases, as Locke et al have shown, the ability of suppliers to evade costly measures remains quite high (as is, perhaps, the willingness of lead firms to appear to be doing more than they are).60 59 60
Vogel 2008. Locke, Qin and Brause 2007.
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So far, our hypotheses have not addressed directly the relationship between public and private governance, although implicit throughout has been the assumption of a deficit or vacuum of public governance. But the trajectory of private governance cannot be addressed without simultaneously considering the trajectories of public governance. We suggest, therefore, two final hypotheses about the future direction of private governance that reflect more explicitly the interplay between private and public governance. These two hypotheses are somewhat different in character than the first four, in that they seek less to explain the current pattern than to predict the way in which private and public governance might co-evolve in the future. Hypothesis 5: The more production becomes concentrated in the larger emerging economies, the more we should expect public governance in these countries to strengthen. A recent World Bank study on Global Value Chains in a Postcrisis World argues that the global crisis of 2008-09 has not reversed globalization, but rather accelerated two long-term trends in the global economy: the consolidation of global value chains at both country and firm levels, and the growing salience of developing economies in the South as end markets for global production.61 The consolidation of production in supply chains opens the door for a renewed emphasis on public governance. In an effort to reduce transaction costs and spread risk, lead firms are promoting rationalization of their global supply chains, with an emphasis on a smaller number of larger, more capable suppliers in a handful of strategically selected countries. This can be seen in industries as diverse as apparel,62 automobiles,63 and electronics.64 In addition, some lead firms are returning to strategies of vertical integration, a reversal of the efficiency arguments that fostered the outsourcing and specialization of global supply chains in previous decades.65 As a result of these trends, production is increasingly consolidated a relatively small number of countries, most notably the large emerging economies of China, Brazil and India. In the apparel industry, for example, China more than doubled its share of global apparel exports from 15.2% to 33.2% between 1995 and 2008; Turkey, Bangladesh and India, the next three largest developing country apparel exporters, slightly improved their collective global market share from 61
Cattaneo, Gereffi and Staritz 2010. Gereffi and Frederick 2010. 63 Sturgeon et al 2009. 64 Sturgeon and Lester 2004; Sturgeon and Kawakami 2010. 65 Worthen, Tuna and Scheck 2009. 62
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8.9% to 9.8% between 2000 and 2008, while Mexico fell sharply from 4.4% of global apparel exports in 2000 to 1.4% in 2008.66 Similarly, India has become a global leader in offshore services, with a peak 45% market share in 2008.67 Notwithstanding this growing concentration of production among a number of large emerging economies, most notably China and India, we also see continued outsourcing of production from large emerging economies to other, lower-cost countries, such as Vietnam, Cambodia and Bangladesh, as Chinese and Indian producers seek to climb the value chain to higher value and more skill-intensive activities. Recall that private governance emerged to fill the void of public governance created by the diffusion of production across multiple governmental jurisdictions. To the extent that we now see consolidation of production in larger suppliers located in a handful of emerging economies, the ability of these governments to exercise control over production practices in their jurisdiction could be enhanced. Moreover, as China, India, Brazil and other emerging economies grow, standards of living are more likely to rise, and with them societal expectations about labor, environment, health and safety standards.68 Unless actively checked by the state, those expectations may take the form of political pressure on the state to regulate such matters. Demand for greater public governance may also come from firms. This dynamic is evident in apparel value chains, for example, where Nike, The Gap, and other more socially conscious producers have an incentive to support government regulations that force their non-branded competitors to adopt similar practices in their supply chains. There is growing evidence for a trend towards stronger public regulation in the large emerging economies. Most prominent, perhaps, have been the actions of the Chinese government, largely in response to growing pressure from domestic groups. On the labor front, for example, growing dissatisfaction with labor practices led in 2008 to passage of a new Chinese Contract Labor law, which strengthened a variety of worker rights and gave greater standing to Chinese labor unions. By creating new contractual rights and a forum for presenting grievances, the Chinese labor law has enabled further activism. According to The Economist, by July 2010, more than 280,000 labor disputes had been handled by Chinese courts.69 And in environmental policy, China has made significant strides in strengthening its policies and enforcement capacities.70 66
Gereffi and Frederick 2010, 8. Gereffi and Fernandez-Stark 2010, 20. 68 See Inglehart 1981; Inglehart 2000. 69 Economist 2010. 70 See, for example, You and Huang 2009. It is also true that the number of reports of problems has increased, but it is much more likely that this increase reflects greater willingness to report than it does any increase in actual abuses. 67
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Similarly, Brazil has been moving in the direction of an increasingly mature public regulatory regime for some time. On labor, the government has pushed for increased formalization of work, improved its labor inspection capabilities, and raised minimum wages, among other policies.71 On the environment, as Hochstetler and Keck document, the rise of environmental activism in Brazil has translated into stronger state policy.72 This trend towards greater public governance capacity is not limited to the large emerging economies. Bangladesh, which remains an extremely poor country, has recently adopted stronger labor regulations for its apparel sector, including a very large increase in the minimum wage, largely as a response to pressures from workers groups.73 Whether the new regulations will be observed is unclear, but notably, the changes were supported by many of the largest apparel buyers, including Walmart, Tesco, H&M, Zara, Carrefour, Gap, Metro, JCPenney, Marks & Spencer, Kohl’s, Levi Strauss and Tommy Hilfiger, commitments that may give workers and their advocates a vehicle to hold employers accountable.74 Hypothesis 6: Stronger public regulation in developing countries will reinforce rather than replace private governance, and will promote multi-stakeholder initiatives involving both public and private actors. The rise of state governance does not imply the abandonment of private governance for various reasons. First, for the foreseeable future, the global economy will remain characterized by distributed production that spans national borders. National governments, therefore, will continue to face difficulties in regulating actors outside their jurisdictions. Second, states can use private governance to their ends. By relying on the power of lead firms, countries can condition access to their markets on lead firm participation in monitoring their suppliers rather than rely on direct state regulation. Third, states and international organizations may find it expedient to reinforce certain types of private governance.75 States can help overcome information market failures by providing information directly or by standardizing labeling practices, for example, as has been the case with organic foods. Given these considerations, rather than a simple return of the state, we envision the emergence of multi-stakeholder governance in which public and 71
de Andrade Baltar et al 2010. Hochstetler and Keck 2007. 73 AFP, 29 July 2010. Available online at: http://www.google.com/hostednews/afp/article/ALeqM5ieRqjL0JDDmLXJwiGVFRq7GQyEKw 74 Just-Style, 2 August, 2010. Available at: http://www.just-style.com/comment/continuingprotests-blight-bangladesh-pay-deal_id108475.aspx 75 See, in particular, Vogel 2005. 72
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private modes of governance interact and reinforce each other. Synergies between public and private governance are possible not only at the national level but also internationally. International organizations such as the ILO and the International Finance Corporation (IFC) are interested in promoting such ventures. For example, the ILO’s Better Work program seeks to improve work conditions of textile workers in export processing zones in Cambodia, Haiti, Jordan, Lesotho, and Vietnam, through a multi-stakeholder approach involving NGOs, labor groups, firms, and national governments.76 And the United Nations Global Compact among firms, NGOs, and other entities in the United Nations (UN) system, has helped to give impetus to corporate social responsibility.77 5. Bringing the State Back In: The Evolving Pattern of Public and Private Governance Looking to the future, it is reasonable to expect some maturation of private governance regimes. Notwithstanding the impressive momentum of the private governance movement, however, there are significant limits to what we should expect from codes of conduct, corporate self-regulation, social labeling, and other such initiatives. Although there have been comprehensive efforts to extend and evaluate private governance schemes,78 there are also significant limits to what can be achieved by any non-governmental regime. In the highly competitive global economic environment, unless there is a sustainable competitive advantage associated with socially responsible behavior, it will be hard to sustain meaningful corporate self-regulation.79 Most of the progress in this arena to date has come as a response to (or in anticipation of) social pressure. But sustaining social pressure poses a significant collective action problem for labor, environmental, and other social activists. In addition to the theoretical reasons for limited expectations, the empirical record should also give pause to private governance enthusiasts. For example, those who have looked more closely at the actual effectiveness of codes and other forms of corporate social responsibility generally come away somewhat skeptical.80 Codes adopted by corporations are generally quite vague. Those promulgated by NGOs or international organizations are tougher but rarely complied with.81 Similarly, effective labeling campaigns are rare and even the 76
Lukas, Plank and Staritz 2010. Ruggie 2002. 78 Locke and Romis 2007; Locke, Qin and Brause 2007; Locke, Amengual and Mangla 2009. 79 Orsato 2009. 80 Locke, Amengual and Mangla 2009; Locke, Qin and Brause 2007. 81 Kolk and van Tulder 2005. 77
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most successful have had limited impact to date. Despite the use of Fair Trade coffee as an exemplar of such campaigns, world market penetration of Fair Trade coffee remains very low (by one estimate just 1% in 200882) and the world’s largest roasters remain resistant to the campaign.83 In our view, unless private governance is supplemented and reinforced by public institutions of governance, it cannot provide adequate governance capacity for the global economy. Differences of interest among advanced, developing, and least-developed nations as well as continued resistance by states to limitations on their sovereignty will likely continue to prevent stronger international rules and enforcement capacity. Greater progress is likely to come from building greater capacity in developing country governments. As we have discussed, the consolidation of production in the larger emerging economies and the maturation of those societies, create both opportunity and demand for greater public governance in those countries. In the end, As Ruggie and others have argued, international coordination may be less in the form of formal agreement than in an enlarged version of “embedded liberalism” in which international commerce takes place among countries with comparable systems of national governance.84 This shift back to public governance is to be welcomed for several reasons. First, many corporate codes of conduct merely commit corporations and their suppliers to adhere to local law. Obviously, having strong national laws becomes the crucial determinant in the stringency of such CSR regimes. Second, only national governments can enforce these laws. Since the monitoring and enforcement of codes is costly to corporations, which have limited incentive to enforce them, and NGOs have limited monitoring and no enforcement capacity, only governments have sufficient clout to ensure that codes are followed. Third, corporations lack incentives to include workers in the formulation and implementation of codes. Only governments can ensure that workers are adequately represented. Fourth, in more competitive industries where producers have an incentive to avoid compliance, governments are best positioned to ensure that all producers adhere to common standards. Moreover, it is not clear that we should want to substitute private governance for public, even if we could do it. In addition to basic questions about the legitimacy of governance systems controlled by institutions not accountable to the public, private governance regimes are frequently driven by Northern interests, i.e. by corporations, non-profits, and consumers in the developed world. Büthe’s account of the evolution of the International Electrotechnical Commission, for example, demonstrates that “the material costs of participation clearly created a bias in favor of commercially successful stakeholders from rich 82
Pay 2009. TransFair USA (2005). 84 Ruggie 2008. 83
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countries.”85 Similarly, Fuchs and Kalfagianni note that, in the food sector, the power and legitimacy of retailers as rule setters “results primarily from the dominant ideational structures in developed countries and the political and economic elites of developing countries.”86 Although private regulation may be an important element of economic governance, it cannot and should not stand alone. To a great extent, private governance is a second-best and partial solution to the governance challenge posed by globalization. Because cooperation at the international level has been so difficult, and because national governments in developing countries were initially slow to adapt, the social pressures triggered by globalization have focused more on private governance solutions than they otherwise would. As globalization progresses, particularly as the larger developing country economies mature, it is both likely and desirable that some significant part of the private governance innovations be institutionalized within the national governments of those countries. In the longer run, this would provide more effective, stable, and representative governance for the global economy.
References Auld, Graeme, et al 2010. “Can Technological Innovations Improve Private Regulation in the Global Economy?” Business and Politics 12 (3). Bair, Jennifer, ed. 2009. Frontiers of Commodity Chain Research. Palo Alto, CA: Stanford University Press. Bartley, Tim. 2010. “Transnational Private Regulation in Practice: The Limits of Forest and Labor Standards Certification in Indonesia.” Business and Politics 12 (3). Büthe, Tim. 2010a. “Private Regulation in the Global Economy: A (P)Review.” Business and Politics 12 (3). Büthe, Tim. 2010b. “Engineering Uncontestedness? The Institutional Development of the International Electrotechnical Commission (IEC) as a Private Regulator.” Business and Politics 12 (3). Cafaggi, Fabrizio, and Agnieszka Janczuk. 2010. “Private Regulation and Legal Integration: The European Case.” Business and Politics 12 (3). Cattaneo, Olivier, Gary Gereffi and Cornelia Staritz. 2010. “Global Value Chains in a Postcrisis World: Resilience, Consolidation, and Shifting Markets.” In Global Value Chains in a Postcrisis World: A Development Perspective, edited by Olivier Cattaneo, Gary Gereffi and Cornelia Staritz, 3-20. Washington D.C.: The World Bank. 85 86
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Olson, Mancur. 1965. The Logic of Collective Action; Public Goods and the Theory of Groups. Harvard Economic Studies, Cambridge, Mass.: Harvard University Press. Orsato, Renato J. 2009. Sustainability Strategies: When Does It Pay to Be Green?. Insead Business Press Series, Basingstoke, New York: Palgrave Macmillan. Pay, Ellen. 2009. “The Market for Organic and Fair Trade Coffee.” Food and Agriculture Organization of the United Nations. Polanyi, Karl. 1944. The Great Transformation. Boston: Beacon Press. Reardon, Thomas and Rose Hopkins. 2006. “The Supermarket Revolution in Developing Countries.” European Journal of Development Research 18 (4): 522-45. Riisgaard, Lone. 2009. “Global Value Chains, Labor Organization and Private Social Standards: Lessons from East African Cut Flower Industries.” World Development 37 (2): 326-40. Riisgaard, Lone and Nikolaus Hammer. Forthcoming. “Prospects for Labour in Global Value Chains: Labour Standards in the Cut Flower and Banana Industries.” British Journal of Industrial Relations, http://onlinelibrary.wiley.com/doi/10.1111/j.14678543.2009.00744.x/abstract. Ruggie, John. 1982. “International Regimes, Transactions and Change: Embedded Liberalism in the Postwar Economic Order.” International Organization 36 (2): 379-415. Ruggie, John. 2002. “Trade, Sustainability and Global Governance.” Columbia Journal of Environmental Law 27 (2): 297-307. Ruggie, John. 2008. “Taking Embedded Liberalism Global: The Corporate Connection “ In Embedding Global Markets: An Enduring Challenge, edited by John Ruggie, 231-254. Aldershot, England: Ashgate. Starobin, Shana and Erika Weinthal. 2010. “The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label.” Business and Politics 12 (3). Sturgeon, Timothy J. and Momoko Kawakami. 2010. “Global Value Chains in the Electronics Industry: Was the 2008-09 Crisis a Window of Opportunity for Developing Countries.” In Global Value Chains in a Post-Crisis World, edited by Olivier Cattaneo, Gary Gereffi and Cornelia Staritz, 245301.Washington D.C.: The World Bank. Sturgeon, Timothy J. and Richard Lester. 2004. “The New Global Supply-Base: New Challenges for Local Suppliers in East Asia.” In Global Production Networking and Technological Change in East Asia, edited by Shahid Yusuf, Anjum Altaf and Kaoru Nabeshima, 35-77. Washington D.C.: The World Bank & Oxford University Press.
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Sturgeon, Timothy J., Olga Memedovic, Johannes Van Biesebroeck and Gary Gereffi. 2009. “Globalization of the Automotive Industry: Main Features and Trends.” International Journal of Technological Learning, Innovation and Development 2 (1/2): 7-24. Tarrow, Sidney 1998. Power in Movement: Social Movements and Contentious Politics. Cambridge: Cambridge University Press. TransFair USA. 2005. 2005 Fair Trade Coffee: Facts and Figures. Vogel, David. 2005. The Market for Virtue. Washington, DC: Brookings. Vogel, David J. 2008. “Private Global Business Regulation.” Annual Review of Political Science 11: 261-82. Vogel, David J. 2009. “The Private Regulation of Global Corporate Conduct.” In The Politics of Global Regulation, edited by Walter Mattli and Ngaire Woods, 1-43.Princeton: Princeton University Press. Whytock, Christopher A. 2010. “Public-Private Interaction in Global Governance: The Case of Transnational Commercial Arbitration.” Business and Politics 12 (3). Worthen, Ben, Cari Tuna, and Justin Scheck. 2009. “Companies More Prone to Go ‘Vertical’.” Wall Street Journal (December 1). You, Mingqing and Ke Huang. 2009. “Annual Review of Chinese Environmental Law Developments.” In Environmental Law Reporter News & Analysis, 10484. Washington D.C.: Environmental Law Institute.
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Article 12
PRIVATE REGULATION IN THE GLOBAL ECONOMY
Global Private Politics: A Research Agenda Tim Büthe, Duke University
Recommended Citation: Büthe, Tim (2010) "Global Private Politics: A Research Agenda," Business and Politics: Vol. 12 : Iss. 3, Article 12. Available at: http://www.bepress.com/bap/vol12/iss3/art12 DOI: 10.2202/1469-3569.1345 ©2010 Berkeley Electronic Press. All rights reserved.
Global Private Politics: A Research Agenda Tim Büthe
Abstract In this concluding essay to the special issue on Private Regulation in the Global Economy, I review the main findings, focused on the answers that the papers in this issue jointly suggest to the three sets of core questions noted in the introductory essay: (1) How do private bodies attain regulatory authority? Why do private regulators provide governance and why do the targets of these rules comply? (2) Who governs? Who are the key actors in private regulation and what are their motivations? (3) What is the effect of the rise of private regulation on public regulatory authority and capacity? I then identify and discuss several key issues to develop a research agenda for what I call “global private politics.” KEYWORDS: regulation, global private politics, private governance, non-state actors, IPE Author Notes: Tim Büthe is Assistant Professor of Political Science at Duke University. He is online at www.buthe.info and can be reached via email at
[email protected].
Büthe: Global Private Politics
1. Global Private Politics In two articles in 2001 and 2003, David Baron introduced the notion of “private politics,” defined as attempts to “influence economic activity … without reliance on public institutions or officeholders”1 or, more broadly, “attempt[s] to impose [one’s] will on others” without relying on “lawmaking or courts.”2 This work prompted a fruitful line of research by political scientists, economists, and business scholars, mostly focused on the domestic sphere in the United States.3 At about the same time, scholars in international political economy (IPE) developed a stream of research on “private authority” in international affairs and “global governance.” Scholars in this line of research focused on the same issues as those working on “private politics,” except that the IPE scholars were concerned with transnational actors or influence.4 The articles in this special issue on “Private Regulation in the Global Economy” are part of that vibrant and increasingly interdisciplinary literature in IPE. Scholars in these two traditions have much in common. They recognize that the interactions between private actors can be intensely political. Coordinated purchasing decisions, for instance, can put intense pressure on producers through “normal” market transactions to change their production methods or other aspects of their behavior rather than just their prices; seemingly “technical” rule-making in non-governmental bodies can restrict market access. Most also believe that the exercise of power in such private settings has broader implications for the public interest and public policy—such as when private experts define what are technically “feasible” and desirable levels of consumer safety—so that analyses of public politics and policy, which omit consideration of private politics, will yield biased findings. At the same time, most scholars in both the domestic and inter-/ transnational tradition recognize that private politics rarely if ever takes place completely independently of governments and public politics. For scholars in the global governance tradition, this implies the need to systematically theorize and empirically explore to what extent and how the boundaries of public authority affect the often transnational global private politics, rather than assuming separate spheres. 1
Baron 2001, 7. Baron 2003, 31. 3 For recent reviews, see, e.g., Diermeier 2007 and Werner 2009, esp. 14ff. 4 Key early works in this literature were Cashore 2002; Clapp 1998; Cutler, Haufler, and Porter 1999; R. B. Hall and Biersteker 2002; Kahler and Lake 2003; Mattli and Büthe 2003. See also Büthe 2004 and the review of the literature in the introductory essay to this special issue (Büthe 2010a). This scholarship was of course able to build on the earlier literature on interdependence (especially Keohane and Nye 1972; 1977) and on the observation that, despite the lack of a statelike supra-national authority, there is order of sorts in the international system (e.g., Rosenau and Czempiel 1992; see also Bull 1977:esp.268ff). 2
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At the same time, there are differences across the two traditions that promise to make more systematic engagement across these two literatures fruitful for both sides.5 Baron and other scholars in the domestic private governance literature, for instance, have focused on developing game-theoretic models. Scholars in the literature on transnational governance, by contrast, have mostly preferred informal theoretical arguments and qualitative analyses. Building on the formal models may help the latter scholars examine the internal logic of their arguments.6 At the same time, the greater contextual richness of their analyses may help identify scope conditions of the formal models or assumptions that should be relaxed in the next iterations of the models. In this short concluding essay, I will develop a research agenda for what I call “global private politics.”7 I first review the main findings of the articles in this special issue. I examine primarily what answers they jointly suggest to the three core sets of questions noted in the introductory essay:8 (1) How do private bodies attain regulatory authority? Why do private regulators provide governance and why do the targets of these rules comply? (2) Who governs in private regulation? Who are the key actors in private regulation and what are their motivations? (3) What are the effects of private regulation? In particular, what is the effect of the rise of private regulation on public regulatory authority and capacity? In the context of discussing these findings, I identify and discuss several issues that warrant further theoretical and empirical attention to advance our understanding of global private politics. 2. Who Governs? Demanders, Suppliers, and Targets of Private Regulation The essays in this special issue show that there are multiple ways in which private regulators can attain regulatory authority. Sometimes private actors who want to see rules established in a given issue area proceed to develop the rules themselves; this is what Jessica Green calls “entrepreneurial authority.”9 Often, 5
Such an engagement is all the more warranted as the geographically-based distinction between the empirical subfields of political science is being questioned; see, e.g. Milner 1998 and Duke University's recent reorganization of the department of political science. 6 Baron shows, for example, that even the initial exchange between what I call the demanders and suppliers involves four related but analytically separable strategic interactions. 7 See also Calvert, Gabel, and Haufler 2008. 8 See Büthe 2010a, 3, whose definitions and caveat also apply in this concluding essay. 9 Green 2010a; 2010b. http://www.bepress.com/bap/vol12/iss3/art12 DOI: 10.2202/1469-3569.1345
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however, rule demanders and suppliers are not identical. Moreover, those who supply governance sometimes write rules that apply only to themselves, such as when a medical association develops rules of ethics for its members or generally when professions govern themselves, which has a long-standing tradition going back at least to the middle ages.10 However, even when such rules do not disproportionately advantage the powerful members of the “self-regulating” group (as they often do), they tend to create barriers to entry and thus affect stakeholders beyond those who have a voice in the rule-making process. In the introduction to this special issue, I therefore suggested the need to identify (and analyze the interests of) demanders, suppliers, and targets of private regulation separately.11 2.1. Demanders of Private Regulation Civil society groups (domestic and transnational NGOs) and social activists are clearly the most common demanders of private regulation. This is, however, a diverse set. Many of these activists are exclusively committed to a particular cause in which they have no direct material stake, such as improving working conditions in developing countries or curbing emissions that lead to global warming. Such groups are a key source of demand for private regulation in Tim Bartley’s analysis of labor and sustainable forestry certification in Indonesia and Green’s study of the Greenhouse Gas Protocol.12 They are important in all of the empirical cases examined by Graeme Auld, Ben Cashore, and their co-authors, including the private regulation of trade in live ornamental fish and electronic waste; and they play a background role in Doris Fuchs and Agni Kalfagianni’s analysis of private agricultural/food standards.13 Common to all these cases is the activists’ desire to reduce negative externalities from economic activities (or increase the production of positive externalities). Activists with a rather different set of motivations—religious beliefs—are the primary demanders in Shana Starobin and Erika Weinthal’s analysis of kosher labels.14 Less activist but certainly a part of civil society are consumers (who, like the NGO activists above, mostly live in the wealthy countries of the North, an issue discussed separately below). Many of them appear willing to pay more for characteristics of products 10
See, e.g., Cafaggi and Janczuk 2010, 15-18; Jansen and Michaels 2007. See Büthe 2010a, 6ff. In emphasizing the need to identifying actors and their interests, I concur with Baron (2003, 50) when he writes “A fundamental issue in developing a theory of private politics involving activists and firms is understanding their objectives.” 12 Bartley 2010; Green 2010b. 13 Auld, Cashore, et al. 2010; Fuchs and Kalfagianni 2010. 14 The main rules for keeping kosher are specified in Jewish religious texts and thus are not the subject of demand. What is at issue instead is the interpretation of those ancient rules and the specific procedures for implementing them in modern food preparation (so as to justify the label in question). See Starobin and Weinthal 2010. 11
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that are neither functional nor directly observable (such as “fair” wage payments to workers or the non-use of pesticides in the agricultural production of “organic” fruits and vegetables). The importance of these consumers is most apparent in Fuchs and Kalfagianni’s analysis of private food standards, but such consumers also play a role in many of the other articles in this special issue. These consumers constitute an important part of the demand for private rules for the production of such goods. Business firms constitute the second major kind of demanders. The actors here may be individual firms or groups of firms in temporary alliances or represented by well-established business associations. Beyond this organizational distinction, firms exhibit a variety of motivations. The purest case of firms seeking efficiency gains through private regulation is probably the private rulemaking for transnational commercial arbitration to avoid the costliness of traditional litigation of business disputes, examined by Christopher Whytock.15 Setting up such a system for mutual benefit appears feasible because, at the time of rule-making, all parties to the business contract have presumably an equal likelihood of becoming claimant or respondent, creating incentives to write (or commit to) a fair arrangement. A second, very important motivation for seeking private regulation is to secure commercial opportunities. For this reason, firms are among the demanders in Auld, Cashore, et al’s analysis of shade-grown and organic coffee (where NSMD programs have created a separate high-end market that operates at least inter alia for the benefit of developing country producer cooperatives who sought it),16 Büthe’s analysis of IEC standard-setting for manufactured goods (where private rules open markets, allow for economies of scale, and may give one’s technology a privileged position),17 Fuchs and Kalfagianni’s analysis of standards for produce and other foods (where private rules are sought to be able to benefit from consumer’s willingness to pay more),18 Starobin and Weinthal’s analysis of certification of kosher food preparation and processing (where credible information about compliance literally makes it possible to have a market),19 and even Green’s analysis of greenhouse gas emissions accounting and reduction (where some firms seek to avoid the more costly adjustments that will be necessary if their industry starts to the address the issue only later).20 Technical experts sometimes appear as a distinctive type of actor, even though most of them are financed by private sector firms. Academic as well as 15
Whytock 2010. Auld, Cashore, et al. 2010. 17 Büthe 2010b. 18 Fuchs and Kalfagianni 2010. 19 Starobin and Weinthal 2010. 20 Green 2010b. 16
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government-sponsored and private sector-based technical experts were prominent among those who pushed for transnational coordination to advance scientific research (and with it their personal status) in the early years of the International Electrotechnical Commission (IEC).21 Scientific specialists from government agencies, international organizations, and research universities also put the need to confront particular environmental challenges (such as deforestation, electronic waste, and climate change) on the agenda in several of the cases examined by Auld, Cashore, et al.22 Otherwise, however, technical experts play little role as demanders in the analyses presented here. In the cases of private regulation covered in this special issue, governments and transgovernmental or supranational networks of public officials have mostly adopted a permissive attitude toward private regulation—allowing such collaboration to happen (rather than restricting it as a violation of antitrust laws) and allowing the enforcement of contractual obligations based on private rules, including the enforcement of private commercial arbitration awards,23 etc. In some cases, governments have implicitly delegated to private actors, such as when the EU member states passed a Regulation in 2001 requiring bank charges for domestic and cross-border electronic transfers/payments to be the same. As Fabrizio Cafaggi and Agnieszka Janczuk show, this effectively required the European retail banks to cooperate and privately develop a less expensive EUwide system for processing cross-border payments, even though the EU legislation nowhere explicitly delegated such a task to the private sector (nor to anyone else).24 Only rarely have governments explicitly called for private rulemaking. At the international level, the delegation of technical standard-setting to transnational organizations, such as ISO and IEC in the TBT-Agreement of the World Trade Organization,25 and at the regional level in Europe, the corresponding delegation of product standard-setting to CEN and CENELEC,26 are prominent examples. Greater efficiency (in achieving regulatory harmonization and thus market integration, with benefits to consumer-voters), blame avoidance (since the private rules constitute “best practice” as defined by technical experts), and locking in policies (especially the prominent role for the private sector) may have variously played a role in these cases, but what they have in common is that governments turn to delegating regulatory authority to private bodies as a way to overcome anticipated or often already experienced political deadlock. Thus, Cafaggi and 21
Büthe 2010b, 16-20. Auld, Cashore, et al. 2010. 23 Whytock 2010. 24 Cafaggi and Janczuk 2010, 4-8. 25 Büthe 2010b, 7; see also Büthe and Mattli 2011, 6, 138f and Marceau and Trachtman 2002. 26 Cafaggi and Janczuk 2010, 8-12. 22
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Janczuk find that the EU Commission (usually with the support of some member states) has fostered private regulators in order to overcome legal and regulatory diversity among the member states without having to rely upon extended negotiations among governments with their many veto points. 2.2. Suppliers As noted in the introductory essay, the supply of private regulation must be explained because writing, maintaining/updating, and institutionalizing rules is costly. Private regulators often emphasize that their rules bring efficiency gains and contribute to the provision of public goods, such as reduced global warming due to better or more consistent measurement of greenhouse gas emissions or greater market stability due to better financial reporting or disclosure.27 These collective benefits may play a role in explaining why private actors are willing to supply regulation, that is, why they are willing to invest resources into developing or negotiating private standards or rules. But the analyses in this special issue confirm that the supply of private regulation virtually never occurs unless it also brings private political-economic benefits to the suppliers. In drawing this conclusion, scholars of global governance need to avoid the teleological trap against which Charles Tilly so emphatically warned scholars of state formation: The benefits that some stakeholders derive from a policy or institution (such as a set of private regulations) must not be mistaken as evidence that these stakeholders anticipated the benefit and sought the policy or institution in order to attain it.28 Rawi Abdelal, for instance, overturns a popular explanation for international financial liberalization by showing that private U.S. financial interests ("Wall Street") were either indifferent or opposed when the IMF pushed for the removal of capital controls (i.e., the removal of restrictions on private capital flows) in other countries, even though this IMF policy ended up greatly benefitting U.S. financial interests.29 We should therefore not simply assume that the effects of private regulations explain why they were provided. Indeed, the analyses in this issue are careful to show that private political or economic benefits were not just coincidentally obtained ex post but that they were anticipated, and that these intended consequences were necessary for the supply of private regulation. Who, then, are the key actors, and what are the private benefits that they seek? Almost all transnational private regulations are developed in, and issued by, a collective body. Some are developed by individual firms, but most by broader organizations. Few of these organizations rely solely or even predominantly on 27
Green 2010b; Büthe 2009; Büthe and Mattli 2011, chapter 4. Tilly 1975, 14ff, 621ff. 29 Abdelal 2007, 123ff. 28
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their own staff (i.e., their full-time employees), which makes it important to examine the actual suppliers more thoroughly. The individuals who actually write private rules can in almost all cases be considered “technical experts,” though the pertinent kind of expertise (and who sponsors it) varies. In Whytock’s study of transnational commercial arbitration, for instance, legal experts—especially the lawyers of the contracting firms and members of arbitration bodies—are responsible for most of any new, private rulemaking.30 In Starobin and Weinthal’s analysis, religious leaders from several schools or interpretive traditions within Judaism—and ultimately the local rabbis (in largely cooperative interaction with food producers or processors)—are the key rule-makers and rule-interpreters.31 Engineering and scientific experts, working for private sector firms, play the crucial role as rule-makers in the articles by Büthe and Cafaggi and Janczuk,32 as well as—in conscious, institutionalized cooperation with experts from NGOs—in Green’s analysis. In Auld, Cashore, et al’s as well as in Bartley’s article, representatives of transnational NGOs with technical expertise in agricultural and forestry practices and environmental sustainability compete directly with similar experts or general representatives of local or national (Bartley) or transnational (Auld, Cashore, et al) business organizations (each group establishings its own rules).33 These technical experts may or may not have a genuine commitment to technical improvement (this micro-motive appears not to have been systematically studied so far), but the analyses in this special issue show that they virtually always seek private benefits. Even the religious leaders in Starobin and Weinthal’s study of the kosher labels seek to advance and institutionalize their interpretation of Jewish law. Similarly, Green shows that the chance to establish the definitively “correct” way to measure greenhouse gas emissions at the corporate level was a key motivation for the collaboration between the environmental activists of the World Resources Institute and the group of proactive firms in the World Business Council on Sustainable Development. Relatedly, institutionalizing the rule-making privilege of a particular set of experts (primarily electro-technical engineers) and thus safeguarding their influence over the rules was an objective in the creation and institutional design of the IEC.34 Several articles in this special issue also show that attaining commercial benefits from writing the standard, such as increased market share, is often a motivation for the supply of governance, especially for the supply by firms. In 30
Whytock 2010. Starobin and Weinthal 2010. 32 Büthe 2010b; Cafaggi and Janczuk 2010. Functionaries for professional associations play this role in Cafaggi and Janczuk’s case study of professional services accreditation. 33 Auld, Cashore, et al 2010; Bartley 2010. 34 Starobin and Weinthal 2010; Green 2010b, 3, 9f; Büthe 2010b, 16ff, 20ff, 25ff. 31
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Fuchs and Kalfagianni’s study of private food standards, for instance, food retailers seek to change agricultural production so that it yields products that satisfy consumer demand or are suitable for generating it.35 Last but not least, when the rule suppliers are also among the targets of the regulation, the chance to lower the costs of compliance—vis-à-vis likely government regulation or vis-à-vis competing private standards—should provide a motivation for a willingness to supply private regulation. Cafaggi and Janczuk show, for instance, that the desire to “pre-empt” EU government regulation prompted real estate agents to collaborate on developing a system of mutual recognition of professional qualifications;36 similarly, Green shows that the desire to “avoid undesirable regulatory outcomes”37 was an explicit motivation for many businesses to contribute technical expertise to the development of the Greenhouse Gas Protocol. By contrast, existing private regulations have prompted the proliferation of new private rules with different levels of stringency (or covering different aspects of the issue), for instance, in e-waste and climate change.38 The need for private benefits as a condition for the supply of private regulation has important implications in that it suggests that private regulation cannot be a universal, and may not be a long-term, solution. One way to think about this issue is to focus exclusively on economic benefits as emphasized by the application of the theory of club goods to governance:39 If private regulations allow high-quality or more efficient producers (of goods or services) to distinguish themselves and thus gain an advantage vis-à-vis competitors who cannot meet the more demanding standards, then it either won’t raise standards universally or will achieve universality by driving those competitors out of the market. This in turn reduces the incentive to maintain the high standard—while pushing the market toward an oligopolistic structure, which is undesirable from a public policy perspective. Alternatively, if the private benefits are primarily political—assuring some of influence over others—then private regulation is problematic for democratic governance because it is maintained by excluding some of those who are regulated and/or affected from the opportunity to have a voice in the process. 2.3. Targets of Private Regulation The targets of the private regulations covered by the analyses in this special issue are all producers. They range, however, from small-scale farmers in developing 35
Fuchs and Kalfagianni 2010. Cafaggi and Janczuk 2010, 22. 37 Green 2010b, 3, 8f. 38 Auld, Cashore, et al. 2010, 14f. 39 Casella 2001; Prakash and Potoski 2006; Potoski and Prakash 2009. 36
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countries, who are the primary targets of the private food standards examined by Fuchs and Kalfagianni, and individual fishermen in the tropical reefs of Southeast Asia in the ornamental fish trade case by Auld, Cashore, et al, to all firms within an industry (including major manufacturing multinationals) in the papers by Bartley and Büthe. The rules may target firms in a certain industry within a geographic region, as in the analysis by Cafaggi and Janczuk, or all corporations that omit greenhouse gases (GHG), regardless of where on the globe they might have their production facilities, as in Green’s analysis of GHG emissions accounting standards.40 Before I discuss why targets of private regulations comply, I must ask whether they in fact do so. This is a question crying out for more systematic analysis. Studies of compliance in individual firms, or more precisely their production facilities far from corporate headquarters—compliance with various “corporate social responsibility” standards to which the firms previously committed, including the non-use of child labor etc.—suggest that compliance is poor, even by the subsidiaries or subcontractors of major Western name-brand producers.41 Much anecdotal evidence similarly raises questions about the degree of compliance, though it also suggests that compliance with private regulations is in some cases very good. Private rules that are affiliated with certification bodies, such as in NSMD schemes, provide regular monitoring and measures of compliance. Bartley’s analysis in this issue, however, raises serious questions about the reliability of such data.42 There are few if any broad-based, systematic comparative studies of compliance with private regulations (and none of the papers in this special issue attempts one). Since all rules are broken sometimes, we cannot even say with great confidence whether compliance with private regulations is generally poorer than (or different from) compliance with government regulations. There are, however, many indications that compliance varies greatly. What might explain such variation? Variations in the relationship between public and private authority, discussed in more detail below, are likely to affect rates of compliance. When governments explicitly delegate public authority to a private rule-maker (which, as noted above, is rare among the cases examined in this special issue), such delegation may be accompanied by public commitments to monitoring and enforcement by government agencies, which should result in high(er) levels of compliance. As an alternative to ex ante delegation, governments may ex post adopt a private standard and incorporate it into a public law or regulation. This puts the monitoring and enforcement capacity of the state (such as it is) even more 40
Auld, Cashore, et al. 2010; Bartley 2010; Büthe 2010b; Cafaggi and Janczuk 2010; Fuchs and Kalfagianni 2010; Green 2010b. 41 E.g, Locke, Qin, and Brause 2007. 42 Bartley 2010. Published by Berkeley Electronic Press, 2010
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forcefully behind the private rules. Government delegation to private regulators in Cafaggi and Janczuk’s cases of EU product standards and product safety assessment (and ex ante delegation as well as ex post government endorsement of private standards in Büthe’s study of electro-technology) appear to contribute to the relatively high levels of compliance with private regulations, though systematic analysis of this question is beyond the scope of both of these articles.43 In all other cases analyzed in this special issue, compliance is solely a function of private economic and socio-political incentives, as discussed in the introductory essay.44 Here, a useful analytical distinction between different cases of private politics is whether the underlying issue has the characteristics of a “Prisoner’s Dilemma”-type (PD) cooperation problem or the characteristics of a coordination problem (with distributional conflict).45 Some private rules seek to get the targeted stakeholders to provide a public good, such as offering training in general skills (not just firm-specific skills), which raises educational standards broadly, or to reduce a public bad—i.e., reduce negative externalities—for instance by reducing environmental pollution or shifting to the use of sustainable inputs. In such cases, when private rules seek to get firms in an industry to generate positive, or avoid negative, externalities, each individual firm should want to see the firms in its industry collectively agree to the rules (to gain reputational benefits, avoid government regulation, etc.), but then also has individual incentives to shirk on implementation. If everyone makes the choice that is individually rational, the outcome will be socially suboptimal (undersupply of the public good or oversupply of the public bad) and/or even for each firm in the industry inferior to the outcome obtained if everyone cooperated. The basic 2x2 PD game highlights the fundamental problem: Without effective monitoring and enforcement, compliance problems will be widespread, and the outcome will be socially and individually suboptimal. The empirical cases examined by Auld, Cashore, et al and by Bartley have the characteristics of such a PD game, as do arguably the cases examined by Fuchs and Kalfagianni and by Starobin and Weinthal. Here, then, enforcement by highly motivated private actors is crucial, and all of the problems discussed by Frederick Mayer and Gary Gereffi arise prominently.46 By contrast, if compatibility, inter-operability, or positive network externalities are the key issues—which is the case, for instance, when setting standards to allow computers and their peripherals to communicate with each other or when setting measurement standards that allow greenhouse gas emissions 43
Büthe 2010a; Cafaggi and Janczuk 2010. See Büthe 2010a, 15-20. 45 See, e.g., Abbott and Snidal 2001; Büthe and Mattli 2010. Coordination games need not entail distributional conflicts but without them, they raise few issues for analysis. 46 Mayer and Gereffi 2010. 44
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to be traded—the targets of the private regulations may strongly differ in their preferences over the specific standards they would like to see adopted (as a function of investments already made into a particular technology or switching costs), but they also have a strong incentive to converge on a single solution. Consequently, there is no incentive for non-compliance once a standard has been established. The empirical cases examined by Büthe and Green largely have the characteristics of such a coordination game. These differences, however, should not be exaggerated, not only because the distributional effects of the coordination game can, if they persist and the “players” have a long time horizon, transform the coordination game into a PD game,47 but also because skilled political actors may transform a PD game into a coordination game. If there are positive returns to scale, so that producers have economic incentives to minimize product variety, and social activists are able to generate demand for products with public good characteristics from a sufficient minority of consumers that producers will not want to lose these customers, then improving the product information readily available to consumers (for instance through technological innovations of the type analyzed by Auld, Cashore, et al) can change a PD game into a coordination game, as it removes the incentive for non-compliance for goods made for sale to the informed and committed minority of consumers, and firms will generalize the public goods production in order to use the same production process for all of their products. 3. Implications and Avenues for Further Research The above overview of the articles in this special issue—focused on the main actors and their motivations as demanders, suppliers, and targets of private regulation—raises several issues for a research agenda on global private politics. 3.1. Differences that Matter? Demanders, Suppliers, and Targets Jointly, the papers in this special issue show that there are multiple ways in which private regulation can be established, and I have (above) identified numerous distinctions among the demanders, suppliers, and targets of private regulation, highlighting the distinctions observed and/or discussed in these papers. Such a mapping of the terrain is an important first step. The next and crucial step is to determine which differences matter (most). Specifically, we need to examine which of the distinctions drawn above help us answer key questions, such as: What explains the content of private regulations for the global economy? What are the distributional consequences of the regulations, and why? Under which 47
Fearon 1998.
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conditions does private regulation serve the public interest? Why do the targets of transnational private regulation comply? The theoretical and empirical work required to answer these questions is beyond the scope of this essay, but I want to flag two distinctions that surely warrant closer scrutiny. First, the comparison of the different civil society groups who are the demanders of private regulation in the various articles in this special issue suggests: The more tightly focused and the more intensely committed such groups are (committed to their regulatory objective), the less likely they are to compromise and the more likely they are to retain a focus on the regulated activity. Among the environmentalist groups in Bartley’s, Green’s, and Auld, Cashore, et al’s analyses, the multi-issue NGOs appear to have been more willing than single-issue NGOs to compromise. A multi-issue NGO might compromise, for instance, on rules that reduce pollution by manufacturing firms in a given industry far less than the group would have hoped, because it is able to focus on the achievement of moving the status quo in the “right” direction, and compromise may be welcome because it allows the NGO to shift its attention to other, equally pressing environmental issues, such as fuel efficiency standards for automobiles—thus ironically fuelling the drift and compliance gaps discussed by Mayer and Gereffi.48 By contrast, even though keeping kosher is only one among myriad concerns of the observant Jews in Starobin and Weinthal’s analysis, exhibiting compliance (and therefore soliciting it from the producers and processors of the food they eat) is a sufficiently intensively held preference that continuous monitoring of the labeling and certification process is assured, and significant compromise is out of the question.49 These observations warrant more systematic analysis in future research. Particularly interesting may be what role religion plays here. Is the content of religious beliefs decisive—the activists in Starobin and Weinthal’s analysis understand the rules that they seek as (tightly derivative of) religious commandments—or do religiously-affiliated and secular social activists differ primarily because religious communities have tighter social networks, as shown by Guillermo Trejo?50 Second, what explains the relative influence of different stakeholders in the rule-making (supply) process when several groups with different preferences clamor for influence? Private rule-making for global markets is often highly institutionalized, i.e., it takes place in transnational bodies with clearly discernible structures and decisionmaking procedures that differ across the transnational rulemakers but also differ from the relatively unstructured practices of international
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Mayer and Gereffi 2010. See also Bartley's 2010 discussion of compliance problems that arise when demanders are distant and lack monitoring capacity. 49 Starobin and Weinthal 2010. 50 Trejo 2011. http://www.bepress.com/bap/vol12/iss3/art12 DOI: 10.2202/1469-3569.1345
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diplomacy or even traditional intergovernmental organizations.51 Büthe and Mattli‘s institutional complementarity theory52 suggests that the structure and decisionmaking procedures of such transnational organizations affect the resources that stakeholders need in order to exert influence, resulting in greater influence for stakeholders who are organized in the way that is most compatible with the functional needs arising from the institutional structure at the transnational level. This suggests that future research should examine differences in how stakeholders in transnational private regulation are organized locally or domestically as a possible explanation for differences in influence. 3.2. Specificity of Demand Private regulation differs greatly in the extent to which it achieves the objectives of various stakeholders (or the public interest). One key issue is surely to what extent the three stakeholder groups of private regulation (demanders, suppliers, and targets) diverge from each other, especially the extent to which targets have a voice in the agenda-setting and rule-making process. Where the private rules, which they are asked to follow, seem completely alien, as arguably in many of the places in Indonesia examined by Bartley, the probability of achieving the hopedfor effects depends largely on creating the “right” incentives for the targeted stakeholders. (The probability therefore is low.) The analyses in this special issue, however, suggest that other factors also matter. Particularly interesting is the specificity of demand. Fuchs and Kalfagianni’s analysis of the private regulation of large parts of the food supply of the Western world by a small number of multinational food retailers provides a striking illustration. Vis-à-vis their suppliers in developing countries, each of those retailers is in a monopolistic position as buyer—a market structure known as monopsony. As the authors show, monopsony gives the retailers tremendous power over the food producers.53 A high degree of compliance is therefore assured, constrained only by the cost of monitoring unobservable aspects of the food production process. And yet, of all the cases studied in this special issue, it is by the authors’ assessment the one where private regulation falls most badly short. I submit that the most important reason is the lack of specificity of the demands for private regulation. Consumers, the main demander group in this case, are a diverse group with diffuse interests and virtually no institutional structure. Their “demand” has consisted of little more than a vaguely defined willingness to pay higher prices for goods that come with 51
Relevant here are, of course, actual decisionmaking practices, i.e., the rules (formal and informal) that are actually followed rather than the rules that are merely “on the books.” 52 See, e.g., Büthe and Mattli 2011. 53 Fuchs and Kalfagianni 2010. See also Mayer and Gereffi 2010, 8f. Published by Berkeley Electronic Press, 2010
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the assurance that the way in which the food was produced and processed comports with the consumers’ values. This has given the suppliers—a set of stakeholders with, in this case, virtually no overlap with demanders, nor with the targets of the regulations—great leeway to set the agenda in such a way that it maximizes their own utility, rather than provide public goods. Closer theoretical and empirical scrutiny of this hypothesis is important. Several questions need to be asked. First, is it correct that unspecific demands are generally as detrimental as in the above case? If so, what is the optimal level of specificity, from the point of view of the demander or for society at large? Answering this question will require properly theoretically modeling the relationship between specificity and regulatory outcomes. This relationship is surely not linear, since maximum specificity would imply that the demanders supply the regulations themselves, and the pervasiveness of the delegation of such tasks suggests that even many demanders themselves do not consider it desirable to acquire the necessary expertise to write the rules themselves. The issue also is of practical importance for public policy: Governments have increasingly delegated regulatory authority to private bodies, domestically and in recent years also internationally. One incentive for governments to do so is to save the cost of having to maintain large bureaucracies with expertise across a broad range of issue areas. If the reasoning above is correct, then delegation actually requires some significant ability to give specific guidance, and there must be a point beyond which reducing the issue-specific expertise in the public bureaucracy becomes a net loss.54 3.3. The Market for Rules: Competition in Private Regulation Another important set of questions concerns the causes and consequences of competition between rule-makers. As noted in the introductory essay, whenever private rules have distributional implications, any stakeholders who believe they could get more favorable treatment under a different set of rules may create a competing private regulator to develop such more favorable rules.55 Thus, the standards of the Forest Stewartship Council (FSC) for sustainable forestry, as Auld, Cashore, et al put it, “sparked a spate of producer-backed programs” to provide those who found the FSC’s demands too onerous with alternative sources of labels and certification that, the producers hoped, might also placate Western activists or consumer demand. Similarly, the initial success of labeling and certification efforts to reduce electronic waste and (separately) to stimulate carbon offset projects prompted the creation of numerous competing programs.56 Not all 54
See also Büthe 2010c and the further discussion in section 4 below. Büthe 2010a, 14. 56 Auld, Cashore, et al. 2010, 11, 14f. 55
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private regulators have serious competitors, though. Büthe explains the ability of the IEC to become and remain the clear focal point for transnational rule-making for most electro-technologies with reference to an institutional structure that gave this century-old expert body an ability to behave strategically vis-à-vis potential competitors and establish itself (in conscious pursuit of its organizational selfinterest) as the institutional focal point in its area of expertise long before the international integration of product markets raised the stakes.57 Government recognition of the central role of the IEC in the WTO treaty surely also helped. Similarly, the EU’s ex ante designation or its ex post recognition of a particular private rule-maker (in the realm of product safety standards or the European payments system, respectively) effectively foreclosed competition in Cafaggi and Janczuk’s analysis of private regulators in the EU (although government recognition also raises the stakes).58 While such government support can be important, Green finds that, even without any government involvement, the WRIWBCSD alliance was able to establish itself as the clear focal point for setting corporate greenhouse gas accounting standards. It did so by integrating a diverse set of stakeholders into its decisionmaking procedures, thus reducing the temptation for excluded stakeholders to establish a competing private regulator.59 However, it is not clear whether the similarly inclusive institutional mechanism of the FSC reduced the degree of competition in the realm of forestry certification. Did collective action problems among the disadvantaged differ across these issue areas? Are there other differences across issue areas in how difficult or costly it is to establish a new transnational institution to supply private regulations? This is a promising area for further research for scholars interested in institutional design and institutional change. Whether or not there is competition among rule-makers matters in part because the politics of private regulation differ, especially if there are strong compliance incentives, as discussed in Büthe’s analysis of the IEC. At the same time, the lack of a choice of rules increases the pressure on the private rulemakers to appear legitimate to a broad range of stakeholders. 3.4. Legitimacy The literature on global private politics also needs a better understanding of legitimacy. Legitimacy matters. As Max Weber observed, an emperor, king, or other political, military, or religious leader whose rule is perceived as legitimate by the governed can elicit compliance (most of the time) without having to resort 57
Büthe 2010b. Cafaggi and Janczuk 2010. 59 Green 2010b. 58
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to even the threat of coercion. Clearly, this matters for private regulators for whom compliance is often a key issue. But legitimacy is not a property concept. At a minimum, we should conceptualize it as relational. Fuchs and Kalfagianni’s analysis is helpful to illustrate the point: Stricter rules for food safety and labeling may have increased the legitimacy of major retailers as food suppliers in the eyes of their customers in rich countries (and may have legitimized the price increases that accompanied the changes in some cases)—partly due to the conscious efforts of the retailers to manipulate consumers’ perceptions, as discussed by the authors. These actions also may be said to have increased the retailers’ legitimacy as rule-makers in the eyes of government regulators, who decided that the actions taken by the retailers made public regulation unnecessary. But it hardly increased the legitimacy of the retailers in the eyes of their developing country suppliers, i.e., the producers who, as the targets of the regulations, often had to bear the bulk of the costs of the more stringent standards. A relational concept of legitimacy helps us recognize these different and largely separate political dynamics. Conceptualizing legitimacy as relational, however, is also not entirely sufficient. As Raymund Werle and Eric Iversen point out, input legitimacy (i.e., opportunities for participation in the decisionmaking process) is, as a practical matter, often not feasible transnational private rule-making. And they observe that, for instance, consumers perceive technical standard-setting as more “legitimate” if a consumer representative participates, even if there is no accountability mechanism between the consumers and that person.60 This implies that legitimacy somehow travels or diffuses in ways that are not consistent with a relational conceptualization, either. More conceptual and theoretical work on legitimacy is clearly needed. 3.5. Implications for North-South Relations One more issue warrants mention, even though it is only briefly discussed in a few of the papers in this special issue: What are the distributional consequences of private governance between North and South? As many have noted, most private regulators (the suppliers, but also most of the demanders) appear to be located in the industrialized or “post-industrial” rich countries of the North, whereas most of the targets of private regulations live in the South. This has led some observers to view even rule-making by ostensibly altruistic NGOs as masking a new form of imperialism.61 It may, however, not be coincidental that global private politics, which entails private groups in one country making demands on private groups in 60
Werle and Iversen 2006; regarding the conceptual challenges of theorizing and empirically measuring legitimacy, see also Kratochwil 2006. 61 E.g., Petras and Veltmeyer 2001. http://www.bepress.com/bap/vol12/iss3/art12 DOI: 10.2202/1469-3569.1345
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another, originates in well-established democracies whose citizens are used to seeking and using Hirschmanian “voice” opportunities and have grown (relatively) comfortable with transnational politics. Moreover, how severe is the selection bias in a literature that is so far dominated by US-UK journals and authors? Is there really a dearth of private regulators in developing countries, which may well operate transnationally? Bartley’s study of Indonesia, for instance, finds several non-Western private rulemakers operating there. This literature thus needs more studies of private politics in poorer democracies, especially analyses of the fate of demands originating in those countries. Even if we have underestimated the role of developing country stakeholders in global private politics, there is still reason to be concerned about a differential effect on developing countries. Insofar as governments and private actors now pay attention and expend resources and political capital on transnational private regulators—attention and resources that were previously spent on the domestic political process—then the rise of private regulators comes at the expense of the state. This is more likely to occur in developing countries where state regulatory capacity is often weak.62 In the final section, I therefore now turn to the issue of the effect of the rise of private regulation on public regulatory authority and capacity. 4. Private Regulators and the State When economic actors have incentives not to comply with the rules—which is inherently the case when the objective of the rules is to get them to internalize the negative externalities of their activities—private regulators are hamstrung by their lack of enforcement power. As Mayer and Gereffi emphasize, private monitoring and enforcement can fully compensate for this weakness of private regulation only under ideal conditions, including sustained vigilant attention by altruistically motivated volunteers and the absence of collective action problems, which rarely if ever hold.63 Recognizing these limitations of private regulation is important for both positive analysis and normative assessments. If the two trends observed by Mayer and Gereffi are sustained—global manufacturing activity increasingly concentrating in the larger developing economies of the global South, and those countries’ governments experiencing corresponding increases in the capacity and 62
Note, however, that insofar as common transnational global rules impose adjustment costs, countries that previously had few if any regulations may find it relatively costless to comply with global private rules. In advanced industrialized countries, where historical accidents and deeply embedded institutional differences led to very different rules and practices (see P. Hall and Soskice 2001), adjustment costs can be massive. Such institutional analyses warrant mo 63 See Mayer and Gereffi 2010 and Vogel 2005; 2009, though cf. Starobin and Weinthal 2010. Published by Berkeley Electronic Press, 2010
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professionalism of their regulatory agencies—then government regulation of economic activities within those countries should increasingly become superior to transnational private regulation to reduce negative environmental and social externalities. While recognizing the limitations of private regulation, it is also important not to compare the reality of private regulation with the ideal of public regulation. A comparative assessment of public and private regulation thus should start with the questions: What are the alternatives to private regulation in a global economy? And what kind of governance would be most likely in the absence of private regulation? One reason why asking these questions is important is that transnational private regulation privileges those with material resources and technical expertise. Often, this means that those with a commercial stake will be the key actors within the transnational bodies that supply private regulation. Others, including social activist groups, can compensate for lesser financial resources by greater commitment of time and effort (which may be interpreted as a reflection of more intense preferences), but the elaboration and maintenance of rules for economic actors often requires technical expertise, for which effort and enthusiasm is no substitute.64 This need not mean, however, that a shift to transnational private regulation entails a shift in power to private-sector, commercial interests. Often, commercial interests are just as powerful domestically. The key question then is: What safeguards are in place to make it most likely that a regulator will pursue the public interest? In democratic polities, electoral accountability is ultimately supposed to assure that voters’ interests are weighted approximately evenly, though clearly in practice such accountability is too indirect to be fully sufficient as a safeguard against capture, corruption, etc. Private regulators vary greatly in their structure and decisionmaking procedures, including whether they make any efforts to ensure the participation and consideration of non-commercial interests. Some, such as the European regional standards bodies, CEN and CENELEC, provide financial support (ultimately from public sources) for the participation of representatives of underrepresented groups, especially consumers. Others, such as the FSC have elaborate institutional mechanisms to ensure that different stakeholder groups are given equal weight in the rule-making process. Yet others operate strictly on a commercial model, where the willingness and ability to pay for one’s participation in the decisionmaking process is taken to be the appropriate measure of having a genuine stake in the matter. The latter approach seems like a recipe for the exclusion of non-commercial stakeholders and developing country interests, though Baron notes that many activists themselves prefer private politics which 64
For an elaboration of this argument, see Mattli and Büthe 2005.
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“allows” them to target firms directly rather than lobby governments, because legislative or government-regulatory change is much slower and firms are arguably more proficient at blocking regulatory proposals through the normal political process than when those “proposals” are advanced through social activism, including consumer boycotts, etc.65 Systematic analyses of the conditions under which different stakeholders prefer public versus private regulation and the institutional variation among private regulators are thus promising areas for further research. A final but important question is under what conditions transnational private regulation comes at the expense of public authority. In the introductory essay, I noted several reasons for not assuming as given that private authority diminishes public authority.66 The reasons include that private regulation can in fact strengthen public regulation, for instance if the former addresses problems that are inherently transnational and hence cannot be effectively regulated by any one state unilaterally.67 Two points should be made here: First, it may seem that private regulation is least likely to pose a threat to public authority if regulatory authority has been explicitly delegated to private actors by governments. Yet, such delegation creates incentives for both principal and agent to specialize in ways that increase over time the cost of re-delegation and decreases the principal's ability to monitor.68 If third parties with the "right" expertise but different interests do not exist or face collective action problems, the ability of public authorities to retain control over regulatory outcomes is thus substantially reduced. Second, most of the scenarios under which private regulation strengthens public authority (and maybe even the scenarios under which private regulation implies no loss of governments’ control over outcomes) require a level of state capacity that can be assumed for advanced industrialized democracies but is often lacking in developing countries. Hence private authority may perpetuate or even accentuate the power imbalance between North and South, though as noted above, we should be cautious not to assume the absence of private regulators in developing countries (including possibly LDC-only transnational private regulators) just because private regulators from developing countries play little role in U.S. and more generally in Northern accounts of the international political economy. 65
Baron 2003. Büthe 2010a, 22f. 67 Note that this scenario again illustrates the quintessentially political nature of private regulation: If governments of all the states that are affected by a global or regional transnational problem agreed on the need to regulate and on the regulatory solution, inter- or transgovernmental regulatory cooperation could solve the problem directly. For a recent discussion of the potential of private regulation to strengthen public regulation, see Levin, Cashore, and Koppell 2009. 68 Büthe 2010c. 66
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In all of this, we should keep in mind that there is no inherent need to posit public and private regulation as opposites between which a choice must be made. In recent years, scholars have increasingly examined various forms of “coregulation” involving both public and private authority in symbiotic relationships. Most of these models, just as the formal models of private politics, have been developed with only domestic regulation in mind.69 Scholars of the international political economy will benefit from considering their applicability to the realm of global private politics. 5. Conclusion The articles in this special issue have sought to advance our understanding of the politics of private regulation in the global economy in three ways. First, the rich empirical analyses of specific examples of private regulation, many of which have not previously been examined systematically, broaden our knowledge base. Second, each author or group of authors addresses analytical and empirical questions of their own choosing about specific aspects of private regulation, bringing a range of theoretical lenses from across the social sciences to bear on this important issue. Third, with varying emphasis, the articles have addressed three common sets of questions highlighted in the introductory essay. In this concluding essay, I have summarized the authors’ answers to these questions, drawn comparisons across the cases to derive broader insights, and identified key issues for further research. In doing so, I have raised a wealth of theoretical, empirical, and even normative questions—many more than I (and the contributors to this special issue jointly) have answered. I hope that these questions will stimulate new research on one of the research frontiers of international political economy: global private politics. References Abbott, Kenneth W., and Duncan Snidal. 2001. “International 'Standards' and International Governance.” Journal of European Public Policy 8 (3): 345-370. Abdelal, Rawi. 2007. Capital Rules: The Construction of Global Finance. Cambridge, MA: Harvard University Press. Auld, Graeme, Benjamin Cashore, et al. 2010. “Can Technological Innovations Improve Private Regulation in the Global Economy?” Business and Politics 12 (3). 69
For an excellent overview, see Balleisen 2010, esp. 468-476.
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Balleisen, Edward J. 2010. “The Prospects for Effective Coregulation in the United States: A Historian's View from the Early Twenty-First Century.” In Government and Markets: Toward a New Theory of Regulation, edited by Edward J. Balleisen and David A. Moss. New York: Cambridge University Press, 443-481. Baron, David P. 2001. “Private Politics, Corporate Social Responsibility, and Integrated Strategy.” Journal of Economics & Management Strategy 10 (1): 7-45. ———. 2003. “Private Politics.” Journal of Economics & Management Strategy 12 (1): 31-66. Bartley, Tim. 2010. “Transnational Private Regulation in Practice: The Limits of Forest and Labor Standards Certification in Indonesia.” Business and Politics 12 (3). Bull, Hedley. 1977. The Anarchical Society: A Study of Order in World Politics. New York: Columbia University Press. Büthe, Tim. 2004. “Governance through Private Authority? Non-State Actors in World Politics.” Journal of International Affairs 58 (1): 281-290. ———. 2009. “Technical Standards as Public and Club Goods: Who Is Financing the International Accounting Standards Board and Why?” In Voluntary Programs: A Club Theory Approach, edited by Matthew Potoski and Aseem Prakash. Cambridge, MA: MIT Press, 157-179. ———. 2010a. "Private Regulation in the Global Economy: A (P)Review." Business and Politics vol.12 no.3 (October 2010). ———. 2010b. "Engineering Uncontestedness? The Origins and Institutional Development of the International Electrotechnical Commission (IEC)." Business and Politics vol.12 no.3 (October 2010). ———. 2010c. “The Dynamics of Principals and Agents: Institutional Persistence and Change in U.S. Financial Regulation, 1934-2003.” Unpublished manuscript, Duke University. Büthe, Tim, and Walter Mattli. 2010. “International Standards and StandardSetting Bodies.” In Oxford Handbook of Business and Government, edited by David Coen, Graham Wilson and Wyn Grant. New York: Oxford University Press, 440-471. ——— and ———. 2011. New Global Rulers: The Privatization of Regulation in the World Economy. Princeton: Princeton University Press. Cafaggi, Fabrizio, and Agnieszka Janczuk. 2010. “Private Regulation and Legal Integration: The European Example.” Business and Politics 12 (3).
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Calvert, Randall, Matthew Gabel, and Virginia Haufler. 2008. “Remarks on ‘Private Politics’ in Different Subfields.” The Political Economist: Newlettter of the APSA Section on Political Economy 15 (1): 2-3. Casella, Alesandra. 2001. “Product Standards and International Trade: Harmonization through Private Coalitions?” Kyklos 54 (2-3): 243-264. Cashore, Benjamin. 2002. “Legitimacy and the Privatization of Environmental Governance: How Non-State Market-Driven (NSMD) Governance Systems Gain Rule-Making Authority.” Governance 15 (4): 503-529. Clapp, Jennifer. 1998. “The Privatization of Global Environmental Governance: ISO 14000 and the Developing World.” Global Governance 4 (3): 295-316. Cutler, A. Claire, Virginia Haufler, and Tony Porter, eds. 1999. Private Authority and International Affairs. Albany, NY: State University of New York Press. Diermeier, Daniel. 2007. “Private Politics: A Research Agenda.” The Political Economist: Newlettter of the APSA Section on Political Economy 14 (2): 1-9. Fearon, James D. 1998. “Bargaining, Enforcement, and International Cooperation.” International Organization 52 (2): 269-305. Fuchs, Doris, and Agni Kalfagianni. 2010. “The Causes and Consequences of Private Food Governance.” Business and Politics 12 (3). Green, Jessica F. 2010a. Private Actors, Public Goods: Private Authority in Global Environmental Politics. Unpublished Ph.D. dissertation, Princeton University. ———. 2010b. “Private Standards in the Climate Regime: The Greenhouse Gas Protocol.” Business and Politics 12 (3). Hall, Peter A., and David Soskice, eds. 2001. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. New York: Oxford University Press. Hall, Rodney Bruce, and Thomas J. Biersteker, eds. 2002. The Emergence of Private Authority in Global Governance. Cambridge: Cambridge University Press. Jansen, Nils, and Ralf Michaels. 2007. “Private Law and the State: Comparative Perceptions and Historical Observations.” Rabels Zeitschrifts für ausländisches und internationales Privatrecht 71 (2): 345-397. Kahler, Miles, and David A. Lake, eds. 2003. Governance in a Global Economy: Political Authority in Transition. Princeton: Princeton University Press.
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Keohane, Robert O., and Joseph S. Nye. 2001 (First published in 1977). Power and Interdependence. New York: Addison Wesley Longman. ———, eds. 1972. Transnational Relations and World Politics. Cambridge, MA: Harvard University Press. Kratochwil, Friedrich. 2006. “On Legitimacy.” International Relations 20 (3): 302-308. Levin, Kelly, Benjamin Cashore, and Jonathan Koppell. 2009. “Can Non-State Certification Systems Bolster State-Centered Efforts to Promote Sustainable Development Through the Clean Development Mechanism?” Wake Forest Law Review 44 (3): 777-798. Locke, Richard M., Fei Qin, and Alberto Brause. 2007. “Does Monitoring Improve Labor Standards? Lessons from Nike.” Industrial and Labor Relations Review 61 (1): 3-31. Marceau, Gabrielle, and Joel P. Trachtman. 2002. “TBT, SPS, and GATT: A Map of the WTO Law of Domestic Regulation.” Journal of World Trade 36 (5): 811-881. Mattli, Walter, and Tim Büthe. 2003. “Setting International Standards: Technological Rationality or Primacy of Power?” World Politics 56 (1): 1-42. ——— and ———. 2005. “Global Private Governance: Lessons From a National Model of Setting Standards in Accounting.” Law and Contemporary Problems 68 (3/4): 225-262. Mayer, Frederick, and Gary Gereffi. 2010. “Regulation and Economic Globalization: Prospects and Limits of Private Governance.” Business and Politics 12 (3). Milner, Helen V. 1998. “Rationalizing Politics: The Emerging Synthesis of International, American, and Comparative Politics.” International Organization 52 (4): 759-786. Petras, James F., and Henry Veltmeyer. 2001. Globalization Unmasked: Imperialism in the 21st Century. London: Zen Books. Potoski, Matthew, and Aseem Prakash, eds. 2009. Voluntary Programs: A Club Theory Approach. Cambridge, MA: MIT Press. Prakash, Aseem, and Matthew Potoski. 2006. The Voluntary Environmentalists: Green Clubs, ISO 14001, and Voluntary Environmental Regulations. New York: Cambridge University Press.
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Rosenau, James N., and Ernst-Otto Czempiel, eds. 1992. Governance Without Government: Order and Change in World Politics. Cambridge: Cambridge University Press. Starobin, Shana, and Erika Weinthal. 2010. “The Search for Credible Information in Social and Environmental Global Governance: The Kosher Label.” Business and Politics 12 (3). Tilly, Charles, ed. 1975. The Formation of National States in Western Europe. Princeton: Princeton University Press. Trejo, Guillermo. 2011. Indigenous Insurgency: The Breakdown of Religious and Political Monopolies and the Rise of Ethnic Mobilization in Mexico. Manuscript under contract with Cambridge University Press. Vogel, David. 2005. The Market for Virtue: The Potential and Limits of Corporate Social Responsibility. Washington, D.C.: Brookings Institution Press. ———. 2009. “The Private Regulation of Global Corporate Conduct.” In The Politics of Global Regulation, edited by Walter Mattli and Ngaire Woods. Princeton: Princeton University Press. Werle, Raymund, and Eric J. Iversen. 2006. “Promoting Legitimacy in Technical Standardization.” Science, Technology & Innovation Studies 2 (1): 19-39. Werner, Timothy. 2009. The Private Politics of American Big Business: Public Forces, Self-Regulation, and Corporate Political Development. Ph.D. dissertation, Department of Political Science, University of WisconsinMadison. Whytock, Christopher A. 2010. “Public-Private Interaction in Global Governance: The Case of Transnational Commercial Arbitration.” Business and Politics 12 (3).
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